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Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility and market uncertainty that resulted from the mini-Budget also weighed upon funding markets, particularly for shorter dated trades as can be seen from the achieved spreads below. Note that during the fourth quarter of 2022 no repos were traded with a 12m tenor so the chart reflects the previous quarter’s value.
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The secondary impact of the mini-Budget crisis centred around collateral and the velocity of movement; rather than a lack of balance sheet for repo funding (a la March 2020). Yet, the difficulties around collateral substitutions and settlements did in many cases prompt a review by individual banks’ credit officers, resulting in a temporary reduction or hiatus in repo balance sheet provision in some cases. Once these reviews were completed balance sheet availability opened up again – some with the addition of haircuts to provide additional protection to the bank. Of course, the momentous lack of certainty in the future path of interest rates also impacted the typical repo spread to SONIA as trading a fixed rate forced the banks to take a conservative view on where yields could reach.
All data and sources Columbia Threadneedle Management Limited, as at 30 June 2024 and Valid to: 30 September 2024
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The ramifications of President Trump’s Liberation Day tariffs occupied markets for much of the second quarter as announcements and contra announcements flooded social media channels leaving most struggling to keep up and to parse potential downstream impacts to domestic and global economies. The dramatic proclamations and subsequent reciprocal escalation with China, led to their tariffs reaching 145% i.e. effectively a trade embargo. This sent shockwaves through global markets, resulting in an historic fall in equities and an unusual correlation with fixed income sending yields soaring (prices dropping). Under normal circumstances a fall in equities would lead to a gain in fixed income as investors sought a safer asset to protect capital. In the past the US has benefited from hyper-exceptionalism; with USD as the world’s
reserve currency and an enormous debt market seen as a safe haven, it has permitted debt to balloon to c.$36 trillion, equivalent to 120% of GDP which is unheard of in peace time. With such high debt and President Trump’s policy giveaways this can only
grow, yet prior to Liberation Day the high demand from overseas investors allowed the US government to service and issue debt at cheap levels. The President seemed immune to the pain in the stock market but as bond yields rose he rowed back on many of his tariffs, allowing a 90 day window for countries to negotiate ‘in good faith’. Gradually stockmarkets seemed to believe that everything would work itself out and have retraced their fall. However, bond yields remaining shaky and at elevated levels has prompted the President’s ire to be directed at Jerome Powell and the Federal Reserve for not cutting rates. Against this backdrop, Moody’s cut the rating of the US citing deficit pressures.
Liberation Day brought more pain for Chancellor Rachel Reeves as the UK exhibited a high correlation with the US rise in bond yields. Investors questioned the sustainability of her fiscal rules, noting that higher yields added to cost of issuing and servicing the UK’s debt and eroded her newly won headroom gained from the cuts to welfare announced in the Spring Statement. The Bank of England and Debt Management Office were sufficiently concerned by these market travails to react quickly and decisively. The Bank of England postponed its scheduled longs auction as part of its quantitative tightening programme (exchanging it for shorts) and the DMO drastically changed its remit, reducing the allocation of sales of long-dated gilts and skewing its issuance much shorter. Both actions were welcomed by the market and
brought some relief to UK fixed income. Despite higher than anticipated inflation and concerns over the potentially inflationary pressures of tariffs the Bank of England cut rates by 0.25% to 4.25% in May, with an August cut mostly priced into the market.
The market’s view of where long-term rates could move to in the future is encapsulated in forward rates. The chart below shows where the six-month SONIA swap rate is currently (spot) and at various forward rates out to five years. As can be seen from the chart, markets are exhibiting a flattening effect, with expectations
that further cuts in this cycle will be limited leading to terminal rate expectations averaging at 3.25%. Inflationary concerns from a tariff war and potential negative economic impact are in the balance for the BoE’s decisions. One-year forward rate
expectations have fallen by 0.48% within the last three months.
Figure 1: Six-month SONIA rate
Source: Barclays Live, as at 30th June 2025
Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. Repo costs are
slowly creeping upwards as quantitative tightening continues to drain liquidity from the market. The Bank of England prefers to use its repo facilities to support market liquidity and usage of the short-term facility hit new highs in June. Through judicious use of axes and netted repo opportunities, Columbia Threadneedle Investments were able to access attractively tight repo spreads, thereby keeping the costs incurred by our clients down. Recent repo pricing on special bonds extended to SONIA – 0.05%.
Figure 2: Spread to SONIA
Source: Columbia Threadneedle Investments, as at 30th June 2025
Towards the end of the quarter the US Fed published a draft proposal on their plans to adjust the Supplementary Leverage Ratio (SLR) to allow more flexibility and fuel investment. These suggestions do not go as far as initially had been hoped, however as they are now within a consultation period it is possible they will permit a further loosening. This is important for two reasons, firstly it will free up balance sheet for banks to support greater amounts of trade activity through provision of repo and secondly other jurisdictions aim to maintain a level playing field so that
their domestic regulatory environment does not disadvantage their banks. Therefore, it is possible that there may be a feedthrough impact to lessen such requirements in the UK thereby exerting a welcome downward pressure on repo pricing.
Credit Repo
Following the gilt crisis in 2022, we are seeing interest from clients in credit repo and an appetite from more and more banks to support the same. Credit repo allows portfolios with directly held credit to raise cash to support hedging without selling their credit once their gilt positions are depleted. Pricing is highly bank and bond dependent and as a corollary can also be ‘special’ or in high demand. Recent corporate bond repo trades at Columbia Threadneedle Investments have focused on these special bonds and the appropriate counterparties, allowing repo spreads of
SONIA – 0.05% and SONIA -0.10% to be achieved (between 0.15-0.20% better than conventional gilt repo). Specials in the corporate bond market are typically fleeting rather than persistent as is seen in the gilt market, and as such, means that credit
repo should be thought of as a short-term contingency solution rather than a long-term funding tool. However, it is a beneficial addition to the toolbox and something we are putting in place for relevant portfolios. It has now grown from a niche offering to one with relatively widespread availability; however, pricing and appetite varies considerably, necessitating engagement to ensure the appropriate access to counterparties in the event of credit repo being needed. An alternative to credit repo is to margin gilt repo with corporate bonds; however, for this to have use in a crisis it means paying the cost of the less liquid collateral on an ongoing basis, thereby increasing the overall cost of funding in the portfolio.
Alternate Funding
Repo funding generally remains cheaper for creating leveraged exposure to gilts over the lifetime than the equivalent total return swap (TRS) and so continues to be used within our LDI portfolios. However, pricing for total return swaps can be very bond specific and, where the bank counterparty can obtain an exact netted position, the rate can be extremely competitive. TRS can be longer dated, with maturities ranging from one to three years and even five years, as compared to repo which typically vary in term from one to 12 months. Hence, TRS can be beneficial for locking in funding costs for longer and for minimising the roll risk associated with shorter-term repo contracts. On the other hand, repo facilitates tactical portfolio adjustments more easily and tends to be slightly cheaper. We ensure portfolios have access to both repo and TRS for leveraged gilt funding, so we can strike the right balance between cost, flexibility, and minimisation of roll risk. It is essential to maintain a range of counterparties to manage the funding requirements of a pension fund. We have legal documentation in place with a diversified suite of 24 counterparties for GMRA (Global Master Repo Agreement) and ISDA (International Swaps and Derivatives Association).
Indicative current pricing shows leverage via gilt TRS for a six month tenor is very bank dependent but is on average similar to repo – this depends on the bank’s view of the repo market and whether they are impacted by Net Stable Funding Ratio regulations (NSFR). Part of the reason for higher costs for TRS is a reflection of the lack of straight-through-processing available. Columbia Threadneedle are engaging with various market providers and participants to redefine TRS and the way it is traded and confirmed.
Another way to obtain leverage in a portfolio is to leverage the equity holdings via an equity total return swap (or equity futures). An equity TRS on the FTSE 100 (where the client receives the equity returns) would indicatively price around 0.19% higher than the repo (also as a spread to six-month SONIA). Clearly, this pricing can vary considerably from bank to bank and at different times due to positioning, which gives the potential for opportunistic diversification of leverage.
Contingent NBFI Repo Facility (CNRF)
We welcome the efforts of the Bank of England to create a repo facility for Non-Bank Financial Institutions (NBFIs) – known as the Contingent NBFI Repo Facility (CNRF). In January the Bank of England released more details of the facility and eligibility criteria. At the outset the client or fund must own over £2bn of gilts, there is a concentration limit of £500m of a specific gilt and each client has a borrowing limit of 50% of gilt holdings rounded to the nearest billion. Participants will need to pay an annual fee for access as well as committing to participate in periodic test trades and providing regular information to the Bank. Technically, the facility will be structured as a secured borrowing arrangement rather than a traditional repo so investors will need to ensure they have the appropriate permissions for regular borrowing to use the facility. Please get in touch if you would like to know more about this developing facility.
