Canary in a Coalmine: Securities Lending Predicting Securitized Bonds’ Performance

The authors study information flows in the securities lending market, focusing on structured finance securities, where short selling is rare and they can observe the performance of a security’s underlying pool of loans, thus attenuating potential confounding effects. They find that decreases in lendable amounts predict a worsening performance, consistent with the notion that lenders acquire information from the lending market. Further tests rule out alternative explanations, such as a response to short selling demand or a public signal from prices, and point to lending intermediaries such as custodians as a possible source of information.