In mid-May J.P. Morgan organised a “Global Markets Conference” in Paris. 740 investors accepted the invitation from the US big bank, taking part in a total of 20 sessions. Some 50 experts discussed the situation of the global economy and the outlook for capital markets. J.P. Morgan also used the occasion to ask the delegates for their assessment and the current orientation of their portfolios. Around 250 guests responded to the survey. “Investors are defensively positioned, they are keeping cash as their biggest exposure,” says the Global Research team at J.P. Morgan, summarising the results. For 28% of those questioned, cash holdings in the respective portfolio currency are their most overweight positions. This allocation reveals both a certain caution and uncertainty as to how the monetary and geopolitical situation and the economic outlook will develop. At the same time, cash has regained some of its attraction as an investment after many lean years.
This theory is underpinned by the recent history of the Secured Overnight Financing Rate (SOFR). The reference rate for overnight transactions in the US dollar repo market has climbed above the 5% barrier (see graph). With the turnaround in US monetary policy, the SOFR has awoken from years-long lethargy. The Fed has hiked interest rates a total of ten times since March 2022, and the reference rate has moved up in just as many steps. After a slight delay, the volume of overnight transactions in cash holdings secured by US government bonds also rose. Daily turnover recently came to just under USDbn 1,500, around half as much again as a year ago. The SOFR is calculated as a volume-weighted median from repo transaction data collected by the Bank of New York Mellon. The New York Fed is responsible for its publication each business day.
Leonteq is now using this highly regarded reference rate to construct a new underlying, the Leonteq USD Overnight Return Index. This barometer “collects” the interest on the US SOFR. The USD Overnight Return Index climbs by 1/360th of the reference rate each calendar day. With the SOFR currently standing at 5.05%, the daily rise in the new benchmark amounts to a purely arithmetical and rounded 0.014% or index points. The idea behind this formula is to be able to realise a steady return on USD cash holdings. The Leonteq USD Overnight Return Index can be added to a portfolio by means of an ETP+. The SIX-quoted product maps this special underlying with no term limit, allowing investors to generate an attractive interest rate on their USD cash without having to hold them for a minimum period of time, as is the case with classic fixed deposits.
With such a form of investment, of course, security has an important role to play. Leonteq was the first ETP provider in Switzerland to be licensed and monitored by FINMA as a securities firm. The company also has a capital base of some CHFmn 930 (as at the end of 2022). There is a special form of collateral, too, a pledge being deposited with SIX SIS AG for every ETP+. The depositary agent ensures that investors have access to these funds in the event of the issuer becoming insolvent. Measures are also taken to ensure that the collateral is sufficiently large: SIX Repo AG undertakes a daily review and valuation of the securities. It goes without saying that this process costs money. The management fee for the ETP+ on the Leonteq USD Overnight Return Index is 0.10% p.a. Although this small contribution is taken from the ongoing cash returns, the income of around 4.45% p.a. at the moment stands up well by comparison with USD money market investments callable daily.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.