US equity financing costs have surged to 200 basis points as the quarter-end approaches, far above the 62-basis-point average in May, driven by large share offerings, rising stock valuations, and rapid growth in leveraged ETFs. Bank of America strategists warned that rising equity funding costs could crowd out fixed-income intermediation, potentially causing dealers to shift balance-sheet capacity from fixed income into equities. Morgan Stanley strategists added that quarter-end activity could become messy as prime brokers may turn more conservative, leaving hedge funds with less financing availability and more expensive pricing. Some relief may arrive after June as recent large public offerings finish tying up cash, but financing costs may not fall back to May levels, with Bank of America noting that pressure could persist until demand cools, dealer capacity expands, or US equities decline.
Bank of America CorpBank of America's strategists warn that rising equity funding costs could crowd out fixed-income intermediation, potentially pressuring their business.
Morgan StanleyMorgan Stanley's strategists note that quarter-end activity could become messy as prime brokers may turn more conservative, affecting their financing business.