Why Repo Rates Can Turn Negative

Summary

The document explains negative repurchase agreement rates using euro-area monetary conditions. When central bank policy rates are negative, overnight repo rates can also fall below zero. In the example discussed, a cash borrower posting German or French government bonds as collateral could repay slightly less than the amount borrowed, with the quoted rates applying over an overnight period rather than a long loan term.

The explanation also points to institutional incentives around reporting dates. Banks may seek to shrink reported balance sheets at year-end or quarter-end, affecting the supply and cost of short-term funding and potentially causing repo rates to spike. These points help distinguish the quoted rate from a large cash discount and connect repo pricing to policy and balance-sheet constraints. The document offers a concise general explanation, but it does not detail collateral scarcity, counterparty differences, or the mechanics that determine rates in individual transactions.

Key ideas

• Negative central bank policy rates can contribute to negative overnight repo rates.
• A negative repo rate can mean a cash borrower repays less than the amount borrowed against collateral.
• An overnight rate applies for a very short period, so its cash effect is limited relative to the quoted annualized rate.
• Banks’ efforts to reduce balance sheets around reporting dates can affect repo rates.
• The explanation does not examine transaction-specific pricing or collateral supply in detail.

Tags

# Why would borrowing rates for repurchase agreements be negative


# Why would borrowing rates for repurchase agreements be negative












I was reading this article about repurchase agreements.

I don't understand this graph:

And this paragraph:

Borrowing rates using German and French government bonds as collateral fell to minus 4.9% and minus 5.3%, respectively, which meant market participants were being paid record amounts to borrow.

Why would borrowing rates be negative?

So if I have German bonds and give them to a bank for 100\$, then I will pay back only 95.1\$?

Why would the bank accept such a deal? Besides the fact that they loose money, don't they need to hold cash?

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/37203

Why are repo rates in Euro negative? Because the policy rates of the central bank (the ECB) are negative. In other words, the ECB policies cause overnight repo rates to be negative. Yes, if you borrow money from a bank and post German bonds as collateral, you will pay back less than you borrowed. Don't forget these are overnight rates, so the 'discount' will not be as great as your calculation gives.

If you are also wondering why these overnight rates spike at year end and at quarter ends, it's because these are the dates on which banks report their balance sheets. Banks attempt to reduce their balance sheet on those dates, which can have a significant effect on the repo rate for that day.

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.