Valuing Treasury Repo Specialness by Its Expected Duration

Summary

The note considers whether a Treasury issue that trades special in overnight repo is cheap relative to a fitted Treasury spline. Its central lesson is that the value of repo specialness depends on how long the bond is expected to remain special. A current repo advantage cannot be translated into a durable yield benefit without an estimate of its expected persistence.

The answer illustrates the relationship with a 10-year note: one year of specialness at the stated 100 basis points corresponds to about 10 basis points of yield, while six months corresponds to about 5 basis points. It suggests examining how recently issued notes behave as subsequent auctions arrive, since older issues tend to become less special. These are illustrative estimates, not a complete pricing model; the spline comparison and any expected convergence also depend on the uncertain future path of repo specialness.

Key ideas

• A Treasury’s repo specialness can affect its yield relative to a spline curve.
• The value of a repo advantage depends on the expected time the issue remains special.
• A shorter expected period of specialness implies a smaller yield-equivalent benefit.
• The repo behavior of newly issued notes as later auctions occur can inform persistence estimates.

Tags

# Repo advantage relative value (Treasury)


# Repo advantage relative value (Treasury)












If a Treasury issue is trading special (100bp repo advantage vs GC in overnight repo), and it's worth -10bp in carry (assuming duration is 10) and the error to the Treasury spline is -5bp, would this mean the issue is cheap given the following :

1) The average error to spline is -2bp over the past 3 months

2) If we adjust the spline error (-5bp) to remove the effects of the repo advantage (-10bp), it would be -5 - (-10) = 5bp cheap to the Treasury spline.

I am expecting convergence from 5bp to -2bp. Am I missing something?

## Answer by dm63 (score 3)

https://quant.stackexchange.com/a/41109

A bond like that should trade through the spline curve by an amount that reflects how long it is expected to remain special in the repo market. For example, 1 year at 100bp special is worth about 10bp on a 10yr note. However, 6 months at 100bp special is only worth 5bp of yield. Try to estimate how long it will remain special. You might want to look at the repo behavior of most recently issued notes as further auctions occur. Typically, as bonds get "old" they get less special.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.