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Special repo rates: an introduction

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  • Mark Fisher
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    Abstract

    Transactions involving repurchase agreements (known as repos and reverses) are important tools the Federal Reserve uses in implementing monetary policy. By undertaking such transactions with primary dealers, the Fed can temporarily increase or decrease the quantity of reserves in the banking system. The focus of this article is the repo market, especially the role the market plays in the financing and hedging activities of primary dealers. The author explains the close relation between the price premium that newly auctioned, or on-the-run, Treasury securities command and the special repo rates on those securities. The author's analysis demonstrates that the rents that can be earned from special repo rates are capitalized into the price of the underlying bond so as to keep the equilibrium rate of return unchanged. ; The discussion begins with a description of repos and reverses, the difference between on-the-run and older securities, and the ways dealers use repos to finance and hedge. The article then examines the difference between general and specific collateral, defines the repo spread and dividend, presents a framework for determining the equilibrium repo spread, and describes the average pattern of overnight repo spreads over the auction cycle. Finally, the article discusses convergence trades and repo squeezes. Two appendixes provide detailed analysis.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

    Volume (Year): (2002)
    Issue (Month): Q2 ()
    Pages: 27-43

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    Handle: RePEc:fip:fedaer:y:2002:i:q2:p:27-43:n:v.87no.2

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    Keywords: Repurchase agreements ; Government securities;

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    Cited by:
    1. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 11(Sep).
    2. Graveline, Jeremy J. & McBrady, Matthew R., 2011. "Who makes on-the-run Treasuries special?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 20(4), pages 620-632, October.
    3. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 16(2), pages 204-228, April.
    4. Kenneth D. Garbade & John E. Kambhu, 2005. "Why is the U.S. Treasury contemplating becoming a lender of last resort for Treasury securities?," Staff Reports, Federal Reserve Bank of New York 223, Federal Reserve Bank of New York.
    5. Michael J. Fleming & Kenneth D. Garbade, 2004. "Repurchase agreements with negative interest rates," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 10(Apr).
    6. Kenneth D. Garbade & Matthew Rutherford, 2007. "Buybacks in Treasury cash and debt management," Staff Reports, Federal Reserve Bank of New York 304, Federal Reserve Bank of New York.

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