Treasury News Network

Learn & Share the latest News & Analysis in Corporate Treasury

  1. Home
  2. Bank Relations & KYC
  3. Evaluating Banks’ Overall Performance

US Treasury prepares to strengthen bond market – Industry roundup: 25 April

US Treasury ready to make the bond market more resilient

A long-awaited programme that aims to make the Treasury market more liquid and resilient is expected to get off the ground within days, according to a Dow Jones report.

Known as a buyback programme and is scheduled to be reintroduced next week for the first time in more than 20 years. According to the report, the US Treasury has already conducted limited buyback tests this month and indicated that it will announce the date of its first regular operation as part of next Wednesday’s (1 May) quarterly refunding announcement.

The goal of the programme is to support liquidity in the world’s largest market for government securities. Concerns over the US’s growing debt pile is regarded by traders and strategists as one of the biggest catalysts for a prolonged period of volatility inside the US$27.5 trillion Treasury market.

The Treasury Department has only undertaken two previous series of buybacks; the first taking place in the 1920s. More recently, Treasury bought back US$67.5 billion of outstanding debt via 45 operations held between March 2000 and April 2002, according to Josh Frost, assistant secretary for financial markets.

In a speech last September, Frost said that reintroducing buybacks would not only help to make the Treasury market more liquid and resilient but would also help the department achieve its debt-management objectives.

In a note on Tuesday, Barclays strategists Anshul Pradhan and Andres Mok said that they expect the Treasury to unveil a schedule of purchase operations shortly.

”As to when the Treasury should conduct these operations, we believe it should avoid major data releases,” they said. ”Dealers have noted that they expect robust participation in operations that occur in the late morning or early afternoon, with several suggesting that timing of auctions should be taken into account and conducting buybacks leading [up to] an auction would be helpful.”

- Separately, the Wall Street Journal reports that Barclays Research rates strategists write in a client note that despite the sharp rise in yields so far this year, the US Treasury is expected to keep auction sizes of notes and bonds stable at next Wednesday’s refunding meeting and maintain its guidance of doing so in the upcoming quarters.

“The Treasury is likely to maintain a steady hand and keep auction sizes of notes/bonds unchanged given the outlook for borrowing needs, its earlier guidance and supply concerns not being the driving force in this sell-off,” they say. Investors expecting the upcoming refunding meeting to deliver duration supply relief could be disappointed, the strategists add.


EU parliament bans goods linked to forced labour

The European Parliament has approved rules to ban in the European Union (EU) the sale, import and export of goods made using forced labour.

The new legislation does not directly mention China, but many lawmakers hope it will be used to block imports from China involving the region where the Uighur Muslim minority lives.

Human rights groups say at least one million people, mostly members of Muslim minorities, have been detained in China’s northwestern Xinjiang region and face a series of abuses, including forced sterilisation of women and coerced labour.

With the European Parliament’s green light after a vote in Strasbourg, France, the draft text will officially become law following final approval by the EU’s 27 member states.

The EU has deployed an array of trade tools against China, including anti-subsidy investigations into Chinese state support for green tech such as solar panels.

The latest law seeks to eradicate forced labour from European markets. EU states can remove products found to have been made using forced labour as well as goods made in the bloc comprising material made abroad using forced labour.

“It is simply unacceptable for our Union, which should be a global champion in promoting values, to continue importing and selling in our shops products that were made with blood and tears at some step along their supply chain,” said EU lawmaker Maria Manuel Leitao Marques, who pushed the text through parliament.

Some 27.6 million people were engaged in forced labour in 2021, including about 3.3 million children, according to the International Labour Organisation (ILO).

The new rules give the European Commission the power to launch investigations when there are suspicions about the supply chains in countries outside the EU. Should the use of forced labour be proven, officials will seize the products at the borders and order their withdrawal from the European market and online retailers.

If the risk is in one member state, the local authority in that country will investigate the products allegedly made using forced labour.

For some goods deemed to be at risk, importers will be forced to provide detailed information on the manufacturers.

The EU will also create a regularly updated database about forced labour risks that will include international reports to aid the commission and national bodies in assessing possible violations of the law.

Critics have pointed out that the law does not go as far as the one adopted by the US in 2021, which banned the importation of products from Xinjiang unless businesses could prove their production did not involve forced labour.

Marques urged close cooperation with the bloc’s partners like the US “to prevent operators who are blocked by one country from selling their forced-labour products somewhere else”.


Businesses doubt that cash usage will disappear

Many businesses believe that cash will never become redundant, despite a steady decline in the use of banknotes and coins, a survey of business in six major economies suggests.

UK cash management solutions vendor PayComplete, which surveyed 490 cash processing and management decision-makers within the retail. hospitality and leisure sectors from the US, UK, Germany, France, Italy, and Spain, reports that 57% of businesses expect to never be entirely cashless despite the widespread adoption of electronic, card and mobile payments.

However, regardless of this staying power and continuing popularity with consumers, many businesses are still stuck with out-of-date manual processes for handling, storage, counting and reporting.

PayComplete says that 41% of companies still use manual cash handling processes, leading to many businesses spending over £400,000 (US$490,000) a year on excessive security costs which co sectorsuld be slashed with the introduction of new cash management technology (CashTech) solutions.

Globally, cash usage remains resilient, with estimates of $40 trillion of physical cash in circulation.

"Cash is alive and kicking in the 21st century,” says Simon James, CEO at PayComplete. ”However, organisations aren’t giving it the attention it deserves. Just as card payments evolved from low tech systems like pen on paper slips to magnetic stripes and now fully interconnected electronic systems, cash is having its own digital revolution.

“Previously cash management advancements relied on new hardware being deployed, but this piecemeal approach has created fragmented, Frankenstein cash estates that are inefficient and reliant on manual processes. It’s time for a new digital attitude to physical cash..”

A lack of automation is having a major impact on business operations leading to issues including cash discrepancies, security worries, and high cash management costs, which were ranked as the top three handling and processing challenges. 

High costs due to inefficient processes are a massive concern for businesses. Research reveals that when over six people are involved in cash handling, the cost of security measures increases by over 380%, to an average annual cost of over £409,000. By reducing the number of people involved in handling, businesses can slash their operating costs while simultaneously reducing losses from risk, fraud, and theft by 280%. 

James adds: “Only a few (27%) forward-thinking businesses have fully automated their cash reporting with CashTech systems. This lack of automation when it comes to cash holds organisations back from reaching their full potential.

“Cash management has left the Stone Age and entered the Digital Age. While some organisations are looking to steer customers down the route of cash payments due to their efficiency, the report reveals how others are looking to develop a dual strategy where the cash management processes are reviewed holistically and optimised with new technology to achieve levels of efficiency that have previously only been associated with card payments.

“Anyone who thinks cash is a relic of the past is in for a big surprise. But this doesn’t have to be a problem or challenge to overcome.”

Report shows active ETFs on the rise in Europe and the US

Active exchange traded funds (ETFs) are on the rise reports financial services group Morningstar, whose data shows actively managed ETFs’ share of the US ETF market rose to 8.5% at the end of March 2024, while actively managed mutual funds racked up significant outflows.

While the European market is rallying behind the trend, active ETFs currently comprise a modest segment, accounting for 1.9% of total ETF assets in Europe. Unlike in the US, in Europe, like-for-like strategies aren’t typically available simultaneously in ETF and open-end fund format.

Morningstar launched two reports, providing an overview of the active ETF market in the US and Europe, assessing benefits and drawbacks of the ETF structure, comparing approaches by active managers, and breaking down trends and offerings by asset class.

“Investors are increasingly seeking out low-cost ETFs, and asset managers have more flexibility launching and managing ETFs since the SEC passed the “ETF Rule” in 2019. These factors combined to play a big role in catapulting the growth of the active ETF market in the US,” says Bryan Armour, Director of Passive Strategies Research at Morningstar.

“Mutual fund companies began launching ETFs as the headwinds grew stronger for active mutual funds—but pivoting to ETFs isn’t a sure source of growth for these managers. ETFs are somewhat different than mutual funds, so investors must understand the nuances that ETFs introduce to actively managed portfolios. Capacity risks and wide bid-ask spreads can derail otherwise solid strategies.”

Key takeaways from the US report:

  • Active ETFs have exploded in number and assets in recent years, but they still represent a small slice of the ETF market (8.5%) and active fund market (4%).
  • Fixed income was the most popular active ETF asset class early on, but active equity ETFs have ascended the throne. Active multi-asset ETFs are few and far between since mutual funds and CITs dominate retirement plans.
  • Unlike mutual funds, ETFs can’t close to new investors when they get too big. Strategy capacity is critical in the ETF structure. Morningstar analysts recommend focusing on ETFs that hold liquid securities and reasonably diversified portfolios to avoid capacity risk.
  • ETFs present a growth opportunity for active managers, but assets have mostly funnelled to a few issuers, like Dimensional, and funds, like JPMorgan Equity Premium Income ETF.
  • Trading illiquid ETFs can be costly for investors. Waiting for an ETF to grow its asset base and build a track record can benefit investors.

Key takeaways from the European report:

  • ETFs present a growth opportunity for active managers, but so far assets have mostly funnelled to a few issuers, like J.P. Morgan, Pimco, and Fidelity.
  • ETF investors love low fees. Reflecting this sentiment, the European market for active ETFs has exhibited a notable shift toward greater cost efficiency, with the asset-weighted representative cost decreasing to 0.27% by March 2024 from 0.41% in March 2013.
  • Unlike mutual funds, ETFs can’t close to new investors when they get too big. Strategy capacity is critical in the ETF structure. Focusing on ETFs that hold liquid securities and reasonably diversified portfolios is a good way to limit capacity risk.
  • Fixed income was the most popular active ETF asset class early on, but active equity ETFs have gained the throne as the menu of available options broadened.
  • Most of the active ETFs available in Europe are "shy-active," with lower active share and/or tracking error than similar active open-end funds. As a result, investors should moderate their excess returns expectations from such products.

Bank of Japan discusses yen’s weakness

Policymakers at the Bank of Japan (BOJ) are expected to focus on the effects of a rapidly weakening yen (JPY) on inflation at their two-day meeting starting today as speculation swirls on the timing of the BOJ's next rate hike.

This will be the first policy board gathering since the bank raised interest rates for the first time in 17 years in March to end its negative interest rate policy. The BOJ also ended its yield curve control, which had aimed to keep yields on 10-year Japanese government bonds around zero. However, analysts say that further rate hikes in the near term are unlikely.

However, the JPY has weakened beyond 155 per dollar this week for the first time in more than three decades, fuelling risk that the key level may prompt Japan to step into the market.

The currency depreciated as much as 0.2% to a session low of 155.17 on Wednesday, marking the first time since June 1990 the yen crossed the 155 level against the greenback.

“Intervention risk remains high, regardless of the level,” said Win Thin, global head of markets strategy at Brown Brothers Harriman.

Japanese officials have said repeatedly that they will take necessary action to address excessive moves in the yen if needed. The authorities have emphasised a focus on the pace of the currency’s depreciation rather than a precise level.

In a trilateral statement last week, the US, Japan and South Korea said they would continue to consult closely on foreign-exchange market developments while acknowledging serious concerns of Japan and Korea about the recent sharp depreciation in their currencies.


China may face new wave of bond defaults, warns S&P

China’s state-directed economy may be creating the conditions for a new wave of bond defaults that could occur as early as next year, according to a Standard & Poor’s (S&P) Global Ratings report that noted it would mark the third round of corporate defaults in about a decade.

It follows a period of extremely few defaults in China offset by risingconcerns about overall growth in the world’s second-largest economy.

“The real thing to watch for policymakers is whether the current directives are creating distorted incentives in the economy,” said Charles Chang, greater China country lead at S&P Global Ratings.

China’s corporate bond default rate fell to 0.2% in 2023, the lowest in at least eight years and far below the global rate of about 2.6%, S&P data showed.

“To a certain extent this is not a good sign, because we see this divergence as something that’s not the result of the functioning of markets,” Chang said. “We’ve seen directives or guidance from the government in the past year to discourage defaults in the bond market.”

“The question is: When the guidance to avoid the defaults in the bond market [ends], what happens to the bond market?” he said, noting that’s something to watch out for next year.

“The bigger issue for the government is whether the real estate market can stabilise, and property prices can stabilize,” Chang said. “That can potentially ease off some of the negative wealth effects that we’ve been seeing since the middle of last year.”

Real estate led the latest wave of defaults between 2020 and 2024, according to S&P. Prior to that, their analysis showed that industrials and commodity firms led defaults in 2015 to 2019.


Fear of supply chain failures boosting collaboration

Around nine out of 10 contractors say the biggest headache they currently face is industry supply chain fragility.

Fear of supply chain failure now dominates all other concerns like labour availability and materials cost and supply, according to the UK and Europe construction, property and management consultancy Rider Levett Bucknall (RLB).

But widespread concern about the supply chain in construction has pushed clients towards greater collaboration with contractors, according to RLB’s annual procurement trends report.

Contractors are also seeing an improved appetite for sharing more risk as the climate switches from managing towards investing in the supply chain.

RLB’s Procurement Trends survey found more than half of contractors (54%) saw increasing collaborative practices in procurement, while 35% of contractors stated that clients were more willing to share risk.

In response to market volatility, 16% of contractors now report increased use of project bank accounts.

Around two-thirds of firms also warned of a significant increase in the cost of performance bonds, with 23% reporting they were placing fewer bonds as clients were no longer willing to pay for them.

Paul Beeston, RLB Head of Industry and Service Insight, said: “In previous tightening markets, more competitive forms of procurement have seen a resurgence.

“But that is not universally the case in our 2024 survey. More than half of contractors are seeing collaborative practices in procurement, including a willingness to share risk.

“Clients may still have red lines for their own risk appetite, but they are willing to procure in ways that avoid just shifting that risk to the supply chain.

“The most collaborative routes to market are generally found on smaller projects, fit-outs and refurbishment works, with the highest competitive levels displayed on small to mid-sized projects (£5m to £7.5m) and within the retail and infrastructure sectors.”

At the same time RLB’s survey also found a 9% increase in the use of design and build to 67%, the highest proportion since the start of the survey.


New Zealand FMA updates liquidity risk management guide

New Zealand’s Financial Markets Authority (FMA) has released its updated Liquidity Risk Management Guide (LRM Guide) which follows last September’s Proposed Liquidity Risk Management Guidance Consultation Paper.

The updated guide replaces the existing LRM Good Practice Guide from April 2020 and provides guidance on liquidity risk. The new guide emphasises the importance of effective liquidity riskmanagement at “all stages of fund management”.

”The LRM Guide is an important read for all Managed Investment Scheme (MIS) Managers and their Supervisors, to be clear about the FMA’s expectations in respect of liquidity management, and what is “best practice”, ” comments the law firm MinterEllisonRuddWatts. ”The FMA considers effective LRM as a necessary part of MIS Managers (and Supervisors) demonstrating that they are meeting their statutory duties under the FMCA, to act in the best interests of investors and to act as prudent managers.

”The LRM Guide reiterates the 11 features from the Consultation as features that the FMA considers MIS Managers should apply to their operations and to their funds in order to demonstrate effective LRM,” it adds. These features are summarised as:

  • Overarching framework and strategy.
  • Governance.
  • Contingency plans.
  • Product design.
  • Disclosure and communication.
  • Monitoring framework.
  • Liquidity management tools.
  • Stress testing.
  • Use of leverage to adjust risk/return.
  • Record keeping, data, and systems.
  • Evaluation and review.


Fintech Galaxy launches open banking credit scoring

Fintech Galaxy, the financial service innovation platform, has launched ”innovative credit profiling capabilities” in collaboration with Singaporean fintech company FinbotsAI using artificial intelligence models and aggregated open banking data. ”The new product promises to transform use cases like credit scoring and risk assessment in the Middle East and North Africa (MENA) region,” a release added.

FinbotsAI’s AI credit scoring and decisioning solution, CreditX, has been integrated with Fintech Galaxy’s Open Finance API platform FINX Connect, empowering lenders and merchants across the MENA region to scale lending initiatives and promote financial inclusion, while safely managing credit risk. Facilitated through secure API-based onboarding via FINX Connect, lenders gain access to high-accuracy risk assessment and real-time credit decisioning.

According to the release, lenders across 11 countries in Asia and MENA have seen higher accuracy models generated on the CreditX platform, delivering an increase in approval rates of 20%, a reduction of loss rates by 15%, and a large productivity boost in risk model development. By aggregating various data sets using Open Banking, Fintech Galaxy’s FINX significantly improves the lending cycle, offering superior real-time scoring accuracy compared to legacy methods, logistic regression-based models, and credit bureau data.


Satago partners with mmob for simpler SME embedded finance offering

London-based fintech Satago, which provides working capital solutions, has teamed up with universal API adaptor, mmob. The collaboration ”aims to take the pain out of digitisation for lenders and corporates,” said a release. ”Embedded finance is a sector forecast to generate revenue of US$228 billion by 2028.”

”Through this partnership, lenders and corporates will now have the ability to integrate Satago’s 3-in-1 Working Capital solution for small and medium enterprises (SMEs) into their digital platforms through a single snippet of code,” the release added. ”This approach reduces the initial integration time required to embed Satago to mere hours, minimising the burden on development teams. The integration features automatic, periodic updates thanks to its cloud-based infrastructure. The result is a solution that scales and optimises with the business leveraging it.

”Once embedded, any invoice-issuing SME can then access Satago’s Flexible Invoice Financing, Risk Insights and Credit Control solutions through lenders’ and corporates’ digital channels.”

Sinead McHale, CEO of Satago, said: “We’re delighted to partner with mmob, combining our industry-leading Invoice Finance and Cash Flow Management solutions with their seamless integration technology. This partnership allows us to drive the reach of our platform. It allows lenders and corporates to embed Satago’s transformative

Like this item? Get our Weekly Update newsletter. Subscribe today

Also see

Add a comment

New comment submissions are moderated.