How Special Repo Rates Affect Bond Futures Basis
Summary
The exchange explains how a deliverable bond moving from general collateral repo to special repo can affect its gross and net basis against a futures contract. Special financing lowers the bond’s carrying cost, which can attract demand and raise its price; the price increase and improved carry describe the same underlying effect rather than two separate gains.
The response adds a horizon caveat: the bond’s price may reflect expected specialness over the bond’s remaining life, which can extend beyond the futures contract’s expiration. As a result, the gross basis increase may exceed the carry improvement calculated only through futures expiry. Net basis may also rise, though a brief episode of specialness may not produce that effect. No data or worked example is provided, so the explanation is conceptual and depends on expectations about how long the special repo rate will persist.
Key ideas
- Special repo financing can reduce a bond’s carrying cost and support a higher price.
- The price richening and the carry improvement are two descriptions of the same effect.
- The basis response may reflect expected specialness beyond the futures contract’s expiration.
- Net basis may rise if specialness is expected to last, but a short-lived episode may have little effect.
Tags
Full text
# Repo impact on Bond Future Basis # Repo impact on Bond Future Basis I wanted to check my understanding on something. Say bond A (deliverable, but not CTD) goes special (from GC) at some point. What can we say about how its basis should behave? A. Firstly the bond should richen, therefore, its gross basis should widen (?) B. Also (and I think this is where my confusion is): being long the basis of this bond means that my carry gain/cost is now more +ve/less -ve, which again implies gross basis should widen? But these are both part of the same effect. The richening of the bonds is due to them being cheaper to hold now with a special repo => my carrying cost of this bond is lower. Therefore, if I wanted to buy a bond with a duration of X, I am more inclined to select that with a special repo, than something on GC => there is a bid for this bond from this angle, causing the richening (as its carry will be better). Just wanted to clarify my thoughts on this matter. Thank you. ## Answer by dm63 (score 1) https://quant.stackexchange.com/a/76573 You are correct, these are the same effect, although there is a slight twist. If a bond goes special, its price (and therefore the gross basis) will increase by the expected specialness measured over the whole life of the bond. Note that this period exceeds the expiration date of the futures contract, so the price gain probably exceeds what would be calculated simply by estimating the carry improvement prior to futures expiration. Equivalently , the net basis of this bond may also increase. ( Or may not, if the specialness is expected to be very short dated. ). Hope that makes sense.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.