Why Reverse Repo Does Not Finance a Long Bond Position

Summary

The document explains why investing cash through reverse repo cannot replace repo financing for a long bond, short futures position. In reverse repo, the investor lends cash and temporarily receives a bond as collateral; the bond is due back to the counterparty, so the investor does not retain exposure to its market price. Receiving repo interest and coupons during the transaction therefore does not create the same economics as owning the bond while shorting futures.

The answer identifies the key mismatch: a short futures position paired with reverse repo leaves the trader short the bond market outright. The exchange offers a concise conceptual correction, but gives no pricing formulas, transaction details, or numerical example. Its explanation concerns the price exposure and return structure of the described trade; actual repo terms, collateral treatment, and other cash-and-carry considerations are outside the discussion.

Key ideas

• Reverse repo lends cash against a bond that must later be returned to the counterparty.
• The temporary bond collateral does not give the cash lender ongoing exposure to the bond’s market price.
• A short futures position combined with reverse repo can leave the trader outright short the bond market.
• Reverse repo interest and coupon receipts do not substitute for the economics of holding a long bond position.

Tags

# Why pay repo to finance bond position instead of reverse repo?


# Why pay repo to finance bond position instead of reverse repo?












Assume I would like to hold a long bond, short future position over $n$ days. My current understanding is one must pay daily repo to finance the bond position, i.e. the below diagram. However, it seems strictly better to just reverse repo—in this case I will hold the bond overnight, receive the coupons like before, and now I receive repo interest instead of paying it. Yes, I don't "own" the bond in the traditional sense since it will be repurchased, however it seems like I could use this to satisfy cash and carry arb throughout the holding period and then on $n-1$ days actually buy the bond and deliver it into the short future position. It would be equivalent to cutting out the blue square in the diagram and just having the red square interact with the bond market. What am I missing?

## Answer by dm63 (score 3, accepted)

https://quant.stackexchange.com/a/80361

This idea doesn’t work. If you do a reverse repo (invest cash vs borrowing the bond), you do not have exposure to the bond price. The bond is returned to the counterparty, regardless of what price movement has occurred. Hence if you sell futures against the reverse repo, you will be outright short the bond market.

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