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Special repo rates: an introduction

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  • Mark Fisher

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.

Suggested Citation

  • Mark Fisher, 2002. "Special repo rates: an introduction," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 27-43.
  • Handle: RePEc:fip:fedaer:y:2002:i:q2:p:27-43:n:v.87no.2
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    References listed on IDEAS

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    1. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
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    Citations

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    Cited by:

    1. D'Amico, Stefania & Fan, Roger & Kitzul, Yuriy, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.
    2. Dimitri Vayanos & Pierre-Olivier Weill, 2008. "A Search-Based Theory of the On-the-Run Phenomenon," Journal of Finance, American Finance Association, vol. 63(3), pages 1361-1398, June.
    3. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Sep).
    4. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 204-228, April.
    5. Kenneth D. Garbade & John Kambhu, 2005. "Why is the U.S. Treasury contemplating becoming a lender of last resort for Treasury securities?," Staff Reports 223, Federal Reserve Bank of New York.
    6. 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, vol. 10(Apr).
    7. Graveline, Jeremy J. & McBrady, Matthew R., 2011. "Who makes on-the-run Treasuries special?," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 620-632, October.
    8. Kenneth D. Garbade & Matthew Rutherford, 2007. "Buybacks in Treasury cash and debt management," Staff Reports 304, Federal Reserve Bank of New York.
    9. repec:spr:jglont:v:7:y:2017:i:1:d:10.1186_s40497-017-0075-1 is not listed on IDEAS
    10. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
    11. Morten L. Bech & Elizabeth C. Klee & Viktors Stebunovs, 2012. "Arbitrage, liquidity and exit: the repo and federal funds markets before, during, and emerging from the financial crisis," Finance and Economics Discussion Series 2012-21, Board of Governors of the Federal Reserve System (U.S.).

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