Q1 2025 Review
May 1, 2025
Macro Developments
The first quarter of 2025 was a period of heightened volatility and uncertainty for global markets, driven by a confluence of macroeconomic and geo-political factors. The Trump administration’s implementation of tariffs was a defining element in Q1. Designed to address trade imbalances and revitalize the domestic manufacturing sector, these tariffs raised concerns about disruptions to global supply chains and their potential impact on corporate earnings. The ongoing tariff negotiations fueled volatility, particularly in equity markets, as investors grappled with the implications for global trade.
Central Bank activity and varied economic data led to dispersion across global economies. The Federal Reserve refrained from cutting rates in its January and March meetings but has signaled a willingness to make multiple cuts in the latter half of the year. The Fed’s hesitancy to cut rates this past quarter was driven by a stickier inflation environment as well as elevated economic uncertainty which has weighed on business investment and consumer confidence. Meanwhile, regions like China and parts of Europe showed signs of stabilization, bolstered by policy support, creating a divergent economic backdrop.
North American Equities
After a strong rally late in 2024, the S&P 500 slipped in the first quarter of 2025 as volatility made its return to equity markets. US stocks particularly struggled in the latter half of the quarter, declining over 10%, entering a correction. Despite volatility returning to the markets, securities lenders faced significant challenges with Q1 revenue down nearly 8% compared to last quarter and 13% year-over-year. Market performance varied widely by sector, with defensive sectors such as Health Care, Consumer Staples, and Utilities faring better and growth heavy sectors taking the brunt of the market’s downturn. Similarly, securities lending revenue had a wide dispersion across sectors. Fees in the Technology sector were up 36.85% over the quarter while fees in Health Care were down 42.73%.
Looking at individual securities, Endeavor Group was a top earner, generating $49,251,552 after the announcement that Private Equity group Silver Lake had completed its purchase of the company for $27.50. At the time of the announcement, Endeavor was trading at a price premium to the purchase price, spurring lenders and borrowers to take advantage of the discrepancy.
EMEA Equities
European equity markets outperformed their US counterparts by the widest quarterly margin in decades. This strength was fueled by more attractive valuations, easing geopolitical risks, and robust performance in Financials and Defense sectors. Proposals for increased fiscal spending in countries like Germany, aimed at boosting defense and infrastructure also supported equity sentiment.
Securities lending revenue was relatively stable for the region, with revenue up 1.23% from the previous quarter and down 3.01% on a year-over-year basis. From a country standpoint, Sweden was the largest contributor to securities lending revenue, generating $32 million. Swedish banks, driven by corporate events, were 3 of the top 4 earners in the entire EMEA region. Despite a stellar start to the year for European Bank stocks, investors have begun to worry about potential compression of net interest margins as the ECB continues its easing cycle.
Idorsia, a biotechnology company based in Switzerland, was the 2nd highest earner for the quarter with $5 million in revenue. Idorsia came into focus on the back of an announcement that they were released from an exclusivity agreement with an undisclosed party for the global rights to Aprocitentan, a drug used to treat high blood pressure. The party in talks did not sign the deal as expected, forcing Idorsia to head back to the open market to source new potential buyers.
APAC Equities
Asian Equity Markets displayed significant dispersion. Chinese equities were the standout performers in Q1 2025 returning 15% on the back of improved sentiment towards Chinese tech firms and hints of supportive policies from Beijing. Elsewhere, performance was mixed with Japanese equities pressured by a stronger Yen and Indian stocks facing headwinds.
From a lending revenue perspective, the region had a strong quarter up 9.15% from Q4 and 29.22% from a year ago. A third of that revenue came from Japan, as lenders benefited from increased short interest amidst an inflationary environment that has weighed on Japanese equities. Tawain also contributed more than 30% as the securities finance market showed an increased interest in microchip stocks.
Metaplanet Inc., a Japanese company that has made Bitcoin the center of its corporate strategy, was the top earner for the quarter with $9 million in revenue. The company is among the Top 10 publicly traded holders of Bitcoin, with its balance swelling to 4,206 BTC. This is a good example of Bitcoin’s growing impact on not only markets broadly, but specifically the securities finance ecosystem.
Fixed Income
The fixed income market showed mixed performance in Q1 2025. Yields on US Treasuries declined, with the 10-year yield dropping over the course of the quarter due to rising recession fears and the Fed’s outlook for more rate cuts later this year, providing a tailwind for bond prices. Corporate bonds showed resilience with credit spreads remaining contained for much of the quarter, though they have widened in more recent weeks.
Lending revenue declined over the quarter for all fixed income 8.56%, though it is still up 9.65% year-over-year. Government bonds declined 9.16% over the quarter but were up 10.91% on a year-over-year basis. The quarterly decline was primarily driven by fees, as they were down 7.13% while loan balances were roughly flat, up 0.47%.
Corporate bonds were down 7.06% in the quarter but up 6.68% from the previous year. Within the Corporate bond space, both Investment Grade and High Yield were down on the quarter, 4.23% and 9.69% respectively. Like the Government bond space, this was primarily driven by fees which were down –2.03% for Investment grade and down –8.55% for High Yield.
In Focus: Tariffs
The implementation of new tariffs in Q1 2025 has created significant market positioning activity visible through securities lending data. Sectors with complex multinational supply chains demonstrated the most pronounced increases in lending fees, particularly in Technology Hardware (led by Infinera and Microvision), Semiconductors (with Rigetti Computing and United Micro Electronics showing elevated activity), and Automotive (Luminar Technologies and NIO). The Industrials sector showed the highest average fees as a percentage of contract value at 14.5%, followed by Materials at 9.1%, reflecting investor concerns about supply chain disruptions. Information Technology and Health Care showed the highest utilization rates at 31.6% and 30.4% respectively, indicating strong demand for borrowing these securities. Securities lending metrics are valuable indicators of tariff vulnerability, with fee increases and loan balance providing valuable insight into investor sentiment of companies and market segments.