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The wary canary and the LIBOR OIS spread



Phil Milburn

By Phil Milburn, co-manager on the Global Fixed Income team at Liontrust Asset Management

In financial markets, some dislocations occur where the causality is not entirely clear. Rather than trying to retrofit an exact explanation, I find it helpful to examine each potential factor in turn to reach a conclusion: Sir Arthur Conan Doyle’s fictional detective would be very proud.

I will follow this methodology to ascertain whether the first quarter’s widening in the US 3-month LIBOR OIS (Overnight Indexed Swap) spread is a sign of something amiss or whether the proverbial canary is returning safely from the coal mine.

The canary is worried about the money market plumbing

In the first quarter of 2018, the financial market’s view of the path of US interest rates increased with the 3- month OIS moving from 1.44% to 1.72% over the period. However, the movement in US 3-month LIBOR has been more pronounced: it closed the quarter at 2.31%, over 60 basis points higher than the start of the year.

This divergence means there has been a rapid and dramatic widening in the LIBOR minus OIS spread, a frequently followed barometer of market stress. For those long in the tooth, this is very similar to the TED spread (between Treasuries and Eurodollar futures), except with the OIS replacing 3-month treasury bills in the equation.

Source: Liontrust, Bloomberg April 2018

Source: Liontrust, Bloomberg April 2018

Is this a sign of stress in the market for the wholesale liability financing of US banks? It clearly was during the credit crunch of 2007-2009 and the longer-term perspective in the chart below helps to frame the relative lack of size of the recent moves.

Source: Liontrust, Bloomberg April 2018

Source: Liontrust, Bloomberg April 2018

However, outside of the US and Australia, we are not witnessing such pressures in the Euro, Yen or Swiss Franc funding markets and only the slightest rise in Sterling (see the chart below). Furthermore, many of the other indicators that scare the canaries are also notable by their absence: volatility measures, such as the VIX, have increased but this is mostly correlated to fluctuations in the FAANGs (Facebook, Apple, Amazon, Netflix, and Google) stocks and President Trump’s tariff talks.

Source: Liontrust, Bloomberg April 2018

Source: Liontrust, Bloomberg April 2018

Therefore, it looks like the only mine the canary does not want to go into is the US LIBOR one. But going back to my previous point on causality, what is the issue here? There is a danger of over-extrapolating as US LIBOR is not the cleanest signal of bank funding conditions (note that I am assuming LIBOR is not being manipulated after the myriad fines that banks have endured for their past misdemeanours).

Actual 3-month bank funding is a relatively small market at an approximate volume of $1bn a day, and thus US LIBOR submissions look to other inputs such as repo, forwards and swaps to help triangulate the daily fixes. These other inputs are impacted by many factors outside of the demand and supply of unsecured bank funding. Let’s look at the three suggested causes of the widening.

  1. Treasury bill supply: is the mine being flooded?

There was a tsunami of Treasury bill issuance from early February until the end of March, which followed directly from the ending of the latest debt ceiling impasse. It is a relatively rare event for the US Treasury to issue a net $325bn of bills over a two-month period, with the last occurrence being targeted to accommodate the money market fund reforms in 2016.

Treasury repo closely tracks bills, and thus repo rates have increased over the period. But there is little direct causality between the two as suppliers of bank funding and buyers of bills see little overlap. It is more likely to have gone through a market-based transmission mechanism, with marginal lenders such as commercial paper managers demanding higher rates with bills as an alternative. Effectively, this is a classic economic crowding out of the funding markets represented by higher prices paid for the marginal borrower.

  1. The great repatriation: mining a few rich seams

The second explanation posited for the spread widening is connected to the anticipated repatriation of overseas earnings by large US corporations. With the reduced tax rate, post the fiscal reforms, the formerly “trapped” overseas earnings are expected to flow back into the US. Analysis of the flows is subject to idiosyncratic risk as they can be driven by a few key decision makers, with 40% of the overseas cash stock held by just 10 firms.

The repatriations themselves are not the key driving factor here, rather it is the realised tax liability that they crystallise. Although these can be amortised over an eight-year period, some companies may opt for accelerated tax payments in order to enact special dividends or massive share buybacks.

There has been an increase in non-financial commercial paper issuance and some have suggested this is to pre-fund the tax liabilities; I view this as plausible but only likely to have a small marginal impact.  The companies involved in the repatriations are sitting on vast swathes of cash, maybe money market funds are scared of redemptions? It sounds like a good story but the collective evidence simply does not fit here.

The most likely scenario is that the companies which are facing an impending tax liability have been providing some of the financing for banks. Post the 2016 money market fund reforms, banks were pushed into seeking short-term wholesale funds elsewhere and a cash rich treasury part of a large corporation must have been a great hunting ground. However, the reduction in demand from this source is realistically unlikely to have contributed more than a handful of basis points of LIBOR OIS spread widening.

  1. QE reversal: the Federal Reserve clips the market’s wings

The reduction in reinvestment of the coupon and maturities from the stock of bonds purchased during the Federal Reserve’s quantitative easing (QE) programme is shrinking its balance sheet. As the Fed’s assets reduce, there must, by definition, be a reduction in liabilities within the financial system. Ultimately, as the Fed’s balance sheet shrinks, commercial banks’ reserves decline and excess liquidity reduces. Furthermore, the US Treasury’s cash reserves, built up during the bill issuance, are kept at the Fed, which has a draining impact on the financial system. With US banks being deposit rich and lending conditions pretty sanguine, I believe it is too soon for this to be having a large impact on bank funding rates, but clearly its influence will increase as the excess systemic liquidity is mopped up.

Is it safe for the canary to go back into the mine in the second quarter?

In my opinion, the short answer is yes. Bill issuance is set to slow through the rest of the year as the US Treasury approaches its target cash reserve. In addition, seasonally US tax receipts pick up in April with the 15th representing the deadline for 2017 tax returns.

Examining the evidence, I believe that bill issuance has been the biggest driver of the LIBOR OIS spread widening. The confluence of this with the fears around tax on repatriation flows and the reduction of the Fed’s balance sheet has magnified the movements.

 I suggest most of the impact of the latter two factors has been market-fear related, with relevant constituencies repricing their lending rates just in case. I anticipate a reversal of some of the widening in the second quarter and would estimate the spread to settle into a 30 to 40 basis points range. If this part reversal does not happen, I would start to become concerned that I had missed a fourth explanation and then listen to what the canary had to say for itself.

On a multi-year view, the oscillations in Treasury bill issuance are likely to be transitory in nature.  The repatriation, and corresponding tax crystallisation, is likely to redistribute the stock of excess asset liquidity from shorter dated credit instruments into equities via share buybacks. However, this has no long-term impact on the stock of liabilities, it just will reduce marginal demand and therefore slightly increase the price of bank funding. The largest long-term driver is likely to be the continued reversal of QE and at some stage the Fed’s balance sheet will have shrunk far enough that banks’ liquidity and funding conditions become tight.

How to seek to make money out of this in a bond fund

Even though we are bond fund managers and not money market fund managers, we can still seek to make some money for clients from this. The Liontrust GF Strategic Bond Fund, which is launching on 13 April, will have a mid-single digit weighting in US floating rate notes. These are unlikely to provide significant capital upside but some extra yield never goes amiss.

Additionally, some shorter dated credit spreads have been under pressure and this has created some opportunities to source cheap 4 to 5 year maturity corporate debt. Finally, the yield benefit one receives from hedging other currencies into US dollars has increased; but clearly the converse applies if one is a non-USD investor.


Corporate treasuries under pressure need multi-banking trade finance technology



Corporate treasuries under pressure need multi-banking trade finance technology 1

By Andrew Raymond, CEO, Bolero International

The pressures on corporate treasuries in global trade have continued to mount since an HSBC survey last December found many felt ill-equipped to meet the demands placed on them.

Since then the pandemic has caused massive disruption and has overturned many carefully-laid plans. The same pressures identified in the survey remain, but have intensified. Treasurers still face ever-more complex flows of information from multiple systems while relying substantially on manual processes. At the same time they are expected to drive change and provide strategic insight.

It was no surprise then that two-thirds of treasurers in the survey were planning changes to the technology they used as part of transformation programmes to increase efficiency and bring greater visibility to treasury operations.

Reliance on manual methods and paper documents makes little sense and is unsafe

As we move through the pandemic, pressure on cashflow and working capital remain potent factors. Many treasurers working for enterprises engaged in global trade know that continuing to use manual methods to manage credit lines, and important trade finance instruments such as letters of credit (LCs) or guarantees is hard to justify in an age of digitisation and multi-banking trade finance solutions.

Not least because of the constant problem of fraud and forgery in relation to paper documents, which has led some banks to withdraw from involvement in commodity trade finance. The allegations of prolonged major fraud against the oil trader Hin Leong in Singapore are a case in point, sending tremors through the trade finance world. Court documents reportedly allege the fraudulent use of 58 import letters of credit that were not supported by any underlying transaction. Forged bank statements, bills of lading, sales contracts and invoices are also allegedly involved in very substantial fraud designed to cover losses and give a false impression of liquidity.

The case has not just exposed the susceptibility of paper trade documentation to forgery – it has also prompted some well-known European long-term commodity finance banks to withdraw or review their activities in this field. None of this makes everyday operations any easier for corporate treasuries still using paper in trade finance.

Reducing fraud through digitisation of trade finance

With fraud such a substantial problem, treasurers need to think hard about digitisation and how it reduces the risks. Paper documents can be forged when out of sight while being couriered around the globe. Once a document is digitised, however, fraud or forgery become extremely difficult because of encryption and audit trails. The electronic document remains completely visible at all time, but only to those engaged in the transaction and only the legitimate holder can amend it.

Increasing the efficiency of each trade transaction through digitisation

Digitisation substantially reduces the chances of fraud, but it also transforms how treasuries manage credit lines, letters of credit and guarantees, vastly increasing the speed and efficiency of transactions. It also maintains relationships with preferred banks.

In a digitised workflow, automation takes care of the data-uploading for LCs, while transfer between parties is at the click of a mouse across secure digital networks. LCs are notoriously complex instruments requiring close attention to detail and strict compliance with the rules governing their use. Compliance-checking can also be automated to reduce the administrative burden on treasuries and increase accuracy.

These advantages are important because the use of paper under LCs can imperil a transaction at many potential break-points. Documents must be presented physically, often to a prescribed location. Yet being time-limited, LCs (and bank guarantees) often expire before they are used, or their presentation periods are found to have been exceeded. Prevention of these problems requires constant supervision and many hours of work. When lines expire, new and potentially more expensive credit must be negotiated, while failure to present on time threatens transactions, leads to substantial extra costs, delays in releasing cargo and poor relationships between counterparties.

Consolidating credit lines and trade finance on a single, easy-to-use platform

The most effective form of digitisation for corporate treasuries is through a multi-bank trade finance platform which will slash the time involved in supervising credit lines, LCs and guarantees. An exporter may have thousands of LCs and guarantees with dozens of different banks. Optimising their use still requires laborious logging in and out of banking portals. Finding a single LC or guarantee relating to a transaction can be very difficult.

If treasuries implement multi-banking trade finance solutions, they will eliminate the need to toggle between different bank portals. They gain quick and easy access to all their banks, along with far greater visibility and control of all their credit lines and individual LCs. From a single platform they can manage and edit all their trade finance documentation and electronic presentations, as well as open account transactions and electronic bills of lading. All tracking and reporting is accomplished with a few mouse-clicks, while communications with banks remain secure. This is a major advantage when remote working is on the increase in so many areas of the globe.

As the world changes, but the pressures intensify, there is an urgent need for treasuries to grasp greater efficiency and visibility in their management and optimisation of credit lines and trade finance. It makes the adoption of multi-banking trade finance solutions an obvious first move.

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How can financial services companies deliver great customer service and retain customer loyalty? 



How can financial services companies deliver great customer service and retain customer loyalty?  2

By Chris Angus, Senior Director, 8×8

The reality many banks are facing now is that given Amazon Prime can deliver goods to our doors in less than 24 hours, even during a pandemic, consumers expect the banks they use to keep up with their needs.

People want to be able to access their bank accounts, services and speak to an expert within a matter of minutes, whether it’s via an app on their device, web-chat or over the phone – their expectations are high. Adding to this, the World Health Organisation has advised consumers to use cards instead of banknotes during the Covid-19 pandemic – changing the way consumers pay for products.

With the recent health crisis forcing contact centres to shift to home working, collaboration can be more challenging, especially without the appropriate IT systems and applications in place. A delay in communication or unavailable information can, over time, cause reputational damage.

According to Deloitte, the bank of 2023 will look very different from today, making it clear that financial institutions should consider how they  prepare for the future.

  1. Review your business communications strategy – both inside and out.

A crucial part of this preparation needs to be on reviewing business communications – both internally and externally – ensuring that employees can seamlessly collaborate and connect regardless of their location.

And technology is key to this movement, not only between teams, but also with customers. With the right communication tools in place, employees can gain better insight and deliver services that meet customer expectations. This results in not only satisfied customers, but also happier, and more motivated employees. All of which goes towards truly building a solid foundation for business recovery and continuity.

For many businesses right now, the future feels uncertain, so it’s important to consider the flexibility of solutions before deployment. Cloud computing, for example, allows businesses to stay nimble, scaling up and down their requirements to reflect the needs of the business and their customers.

  1.  Implement an ‘Operate from anywhere’ strategy 

The first half of 2020 was defined by the need for agility, an adjustment in how we operate our day-to-day lives and how we communicate both professionally and personally. The remainder of 2020 and beyond will focus on the application of technology to define how we reinvent working and connecting with each other, our customers, partners, and beyond.

Chris Angus

Chris Angus

To deliver great customer service, while ensuring employees are happy, productive and most of all safe, businesses need to be able to operate from anywhere. Yet, for many with contact centre requirements, this is not an easy transition. Enabling contact centre agents to work flexibly and from remote locations is now a critical component of business operations that must be top of mind for the entire C-suite.

Agents need to have the right tools to ensure they can continue to provide the same level of customer service, from any location. For an operate-from-anywhere strategy to be effective, organisations should consider how they can combine voice, team chat and video meetings on a single technology platform.

The use of multiple apps for multiple purposes can have the opposite effect than intended. Unifying communication channels enables collaboration and productivity while minimizing complexity. It also means a more streamlined and efficient experience for both employees and customers aiding great customer service.

  1. Meeting expectations is key

Not only have recent events affected contact centres operations, but the traditional, in-person branch experience has also been significantly impacted. Bank branches can now only accommodate a small percentage of customers. These restrictions have accelerated the impetus for businesses to meet their customers’ needs online, but also, the expectations of customers  have also evolved rapidly.  Virtual instant communication between businesses and consumers is now becoming a basic customer need. For financial services, this means considering digital-first applications, such as chatbots or instant messaging, where possible.

Businesses now also need to be where their customers are and offer them an omnichannel experience. Via the cloud, businesses can continue to serve customer needs through multiple channels such as voice, video, email, SMS and more.

While meeting expectations needs to be a priority – it’s not enough. Financial services institutions need to ensure they meet those expectations at speed, being the new battleground for competition. When it comes to finances, consumers expect their problems to be dealt with at speed and to the highest standards.

In summary, taking a technology-first approach which enables both employees and consumers to operate and access their data and communication tools from anywhere is the defacto business priority. Helping the financial services industry empower employees to better serve customer expectations with speed and accuracy – and ultimately delivering great customer service.

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How payments can help streamline operations and boost customer satisfaction in the vending industry



How payments can help streamline operations and boost customer satisfaction in the vending industry 3

By Darren Anderson, Business Development Manager, Self Service, Ingenico Enterprise Retail

The COVID-19 pandemic has had an astounding impact on the payments industry, causing cash usage to plummet as contactless and card-not-present volumes soared. Of course, this phenomenon was not unforeseen by payments professionals, who had predicted such a movement away from cash, but not at the speed the virus guidelines facilitated. In fact, due in part to the hygiene perks of contactless payment methods increasing its adoption, 50% of customers think that cash will disappear completely at some point in the future.

The unattended market was ahead of the pandemic in terms of contactless alternative payment method (APM) adoption, and it continues to upgrade its offerings to suit a wider range of industries. Nevertheless, the pain point for vending operators is that they’re often not sure exactly how these technologies work, or how to implement them. And with payments offerings constantly evolving, it’s becoming harder for vending operators to know which solution would be the best fit for their business.

As such, one easy way for vending operators to ease this load is to partner with a knowledgeable payments advisor who can not only provide the best solutions for their business, but guide them through the process and any need-to-knows. It’s also important to investigate the payments trends across the vending market, what the future might bring and what vending operators need to know about newer payments technology and the value it can bring to their unattended retail business operations.

Vending through the pandemic

Coronavirus has impacted the unattended market in various ways. In some cases, vending machine use has decreased as a result of lower footfall and closed premises. However, the nature of vending being self-service, for many it’s just been a case of upgrading systems to meet new guidelines and hygiene recommendations to start boosting their usage again. As cash usage decreased over the course of the pandemic, cards and APMs stepped in to provide a host of benefits, and as customers use and enjoy these seamless technologies, they are fast becoming the preference.

These developments have provided the opportunity for vending operators to embrace newer technologies which, although ultimately positive, can prove daunting if such retailers are not accustomed to working closely with payments. Fortunately, the vending market is in a great position to take advantage of new contactless technologies, being already low on human interaction and having 24/7 capabilities.

Darren Anderson

Darren Anderson

What’s more, the market can not only cater to consumers’ evolving needs, but it can also provide the flexibility and reliability that consumers are relying on as the world around them is changing. Many new technologies can also improve the general operations and management of vending, offering features such as easier on-the-go stock management and maintenance notification technology.

Keeping the consumer in mind

Consumers today want to enjoy the latest innovations and best-in-class customer experiences. These shoppers believe that self-service is a time-saver, and they also view cashless and contactless as faster and more seamless ways to pay – a fact which is reflected in the recent consumer demand for a wider variety of APMs. Customers now expect even more options to pay for their goods and services, from QR codes, to in-app payments and more.

Alongside the cashless trend, data-security and customer experience are two other factors driving the vending market evolution. With constantly evolving fraud developments in the online world, good security is more pertinent than ever, and has to be a central consideration to vending operators – as well as ensuring a seamless customer experience.

From a customer usage standpoint, mobile payments are becomingly increasing popular, as driven by the Gen Z market. According to our research, 63% of Gen Zers have said they would pay more for a mobile experience[1].

Trust and a good experience are also considerable factors across all customer groups, with 95% of customers claiming their loyalties lie with a company they trust[2], and 86% willing to pay more for a positive experience[3].

To appeal to ever-hungry consumers, vending operators need to provide the options they want. In the unattended market, this is relatively simple – not only do they provide a convenient and reliable method of payment for customers, but they also avoid face-to-face interaction. They can also supply a range of different products and accept a variety of payment methods to appeal to all customers, no matter their preference.

Using payments to drive revenue

Driving revenue is a two-pronged approach – you need to appeal to customers to keep them coming, and streamline operations to reduce overheads. In order to meet both parties’ expectations, it’s important to respond well to new vending challenges, taking note of the solutions that enable merchants to provide their customers with the payment methods they prefer.

Payments are complicated, so there’s no need to worry if you’re not hugely familiar with the offering out there, or unsure where to start – that’s where a payment service provider (PSP) can assist. With the expertise that a PSP brings, along with the technological solutions they offer, vending operators can improve customer journeys in all unattended environments.

Such technological solutions are flexible and can cater to specific business needs, while providing easy, quick, and secure payment methods that protect both the business and the customer’s personal data. They can also improve operational efficiency, increasing business performance with features such as real-time reporting and smart transaction management, to provide a best-in-class customer experience.

With smart devices, a secure gateway and advanced acquiring capabilities, PSPs can help vending operators design a flexible vending solution tailored to their individual and specific needs. To find out more about unattended retail and how your company can benefit from Ingenico’s unique expert knowledge, get in contact with Ingenico Enterprise Retail today at

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