Partner content: Setting rates in the 'local to local' lending market

16 Nov 21

As interest rates expectations change we observe a wider spread of pricing in the “LA to LA” market. Does this represent an opportunity for borrowers and investors?

In this note we explore price transparency, supply and demand dynamics and the benefits of screen-based trading.

On 4 November 2021, in a surprise to most investors, the MPC decided to keep Bank Rate at 0.1%.

Policymakers signalled that rate rises are more than likely in the short to medium term however, so emergency central bank policy is not here to stay indefinitely.

The Federal Reserve, for instance, recently announced that it is to start tapering its bond purchases later this month and hence is beginning the process to pull back on its pandemic aid.

UK fixed income markets are also pricing in a rising path for rates.

Currently, one year SONIA Overnight Interest Swaps (OIS) are trading at 0.57% while one year gilt yields are significantly lower at 0.38%.

While both display expectation for rising rates, the difference between the two is intriguing.

SONIA OIS products do not include an exchange of principal and are considered 'risk free', whereas gilt yields do; it would therefore appear logical for gilt yields to trade at a higher level than swaps.

We would expect some upward adjustment for credit risk, albeit extremely low, to apply to gilt yields; a 'term premium' to compensate investors for tying up cash for a year.

So what is going on?

Part of the answer must be supply and demand dynamics.

Investors are so keen to place funds in short-term gilts, perhaps to satisfy regulatory requirements, or maybe for liquidity or security purposes, that they are prepared to accept a return below the implied path for interest rates.

We also see these pricing dynamics in the 'local to local' market.

Recently, this was due to local authorities having large amounts of cash thanks to Covid-19 grants given by central government.

This resulted in a 'borrower’s market', in which those looking for funds could access short-term money at historically low rates.

However, with grants now being used up or paid back and market rates on the rise, there are signs that rates in the LA market are moving towards more ‘normal’ levels.

This will, obviously, help investors out by increasing the yield on deposits across all durations.

This should not necessarily discourage borrowers though, as rates will still be excellent value when compared to other more expensive sources of borrowing such as the PWLB.

One of the objectives of, the online “local to local” dealing platform, is to provide a clear and transparent pricing service.

As the number of registered users and trading volumes grow, it is easier for local authority dealers to see current bids and offers available and gauge supply and demand.

It is also possible for users to place speculative open orders for forward delivery, with automated notification when a suitable match is found.

We find it is authorities that are proactive and become 'market makers' that benefit most when dealing online.

By setting a rate and displaying this for others, who can choose to either ignore, accept, or make a counteroffer or bid, market makers help establish rates.

Consider that the trades displayed on the screen at any one time are “unfilled” orders, the best rates are usually snaffled up quite quickly.

So, if you let the system know what you want by setting deal parameters, our algorithms will do the rest, alerting you as soon as a suitable match is found.

This works especially well for longer dated and forward trades, where you have more time to find a match at the right level and the low transaction fees for borrowers only, at 0.03%, make this very cost effective.

As interest rates change, we hope that directing a proportion of dealing activity online to platforms like iDealTrade will help local authorities improve price transparency and liquidity in the “LA to LA” market.

On the 25 November, we will be hosting an online workshop via Microsoft Teams which is open to all local authorities.

This includes those who are not currently users of the platform.

The workshop will cover an overview of the local-to-local market alongside a discussion around the platform’s functionality.

Please email [email protected] to book your place now or visit to find out more about online trading.


  • David Blake

    David Blake is strategic director at local authority treasury adviser Arlingclose.

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