Why Special Collateral Can Push Bond Repo Rates Lower
Summary
The document explains why the repo rate on a scarce, specific bond can fall when demand to borrow that bond rises. It corrects the intuition that bond buyers are borrowing more cash and therefore should pay a higher rate: in a repo transaction, one party provides cash while the other provides securities, and the rate depends on the collateral exchanged.
A cash lender who requires a particular scarce bond as collateral may accept a lower return than for general collateral. Short sellers also need to borrow and deliver the specific bond, so stronger demand to short it increases borrowing pressure and can make the associated repo rate decline. The replies additionally describe the bond’s spot price rising relative to its forward price, consistent with lower implied carry. The discussion is conceptual and does not quantify rate moves or spell out transaction conventions; the meaning of a negative rate depends on which side of the repo arrangement is being described.
Key ideas
- Repo exchanges cash against securities, so the specific collateral affects the rate.
- A cash lender may accept a lower rate when receiving a scarce bond as collateral.
- Short sellers seeking a particular bond can increase its borrowing demand and push its repo rate down.
- High demand for a bond can raise its spot price relative to its forward price, lowering implied carry.
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Full text
# Why repo goes negative for bonds trading special
# Why repo goes negative for bonds trading special
Please help me find the fault in my reasoning!
It seems to me that when a bond is trading special , it is in short supply and high demand , and so excessive number of people are borrowing money to buy it , and so these people would be willing to pay a HIGH interest rate (= repo rate) in order to get it.
But , the reasoning somehow should be that the repo goes DOWN when bond is special.
Please in your answer actually refute my above reasoning and also please explain without using unclear jargon.
## Answer by nbbo2 (score 3)
https://quant.stackexchange.com/a/32799
In repo/securities lending one person lends money (cash) and the other person lends securities. It is easier to understand if you think of the cash lender, who requires compensation for supplying the liquid asset (cash). If the cash lender supplies cash and receives ordinary ("general") collateral he receives one interest rate (usually clse to the FF rate), but if he insists on receiving a specific collateral which is scarce in the market ("special collateral") then he must accept a LOWER interest rate for lending his cash. At some point the "rebate rate" may even go negative, meaning the cash lender is actually paying interest to borrow the securities.
## Answer by dm63 (score 3)
https://quant.stackexchange.com/a/32808
Treasury bonds go "special" when many participants want to short them (playing for s higher yield). The person who shorts the bond needs to deliver it to the counterparty, so must borrow that exact bond (versus investing cash) in the repo market. If lots of people want to do that , the repo rate goes down.
## Answer by Randor (score -1)
https://quant.stackexchange.com/a/42628
theres high demand for the bond now , so spot price of bond goes high relative to fwd price of bond , therefore repo = carry goes down, even negative.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.