Comments on: Negative Repo Rates Today

By: Samik Nath

Samik Nath — Wed, 14 May 2008 13:44:30 +0000

Thanks for your reply. repo fee is a scarcity premium … Cash is scarce …. so who is delivering the cash later is paying the premium right? So it looks like you are saying with negative repo scenario bond is slightly more scarce than cash? …in case of zero people were “scarcity-neutral” ….
we dont know that we know what we dont know?

By: jck

jck — Mon, 24 Mar 2008 21:09:05 +0000

That’s more or less what I wrote in a comment at Paul Krugman’s blog. There is a credit spread component, most of the time the spread is so small that it doesn’t matter. But it matters now. And by the way NONE of that stuff, negative repo, liquidity trap, can happen with the ECB. First they have a minimum deposit rate AND they are super senior to all credits in the zone including governments which means that govvies rates and repos have a credible floor:the ECB deposit rate. One more lesson to learn, Creative Ben.

By: phyron

phyron — Mon, 24 Mar 2008 20:44:02 +0000

SOMETIMES WRONG BUT NEVER IN DOUBT?
As always confusion reigns when one talks about things that are not defined… and worse when one as Nath above… is not aware that is not aware..
Its a tough world in which Cash is not defined but c’est la vie…
Cash? Cash where? Cash left with whom?

Negative repos’s and their concomittant Prompt Delivery Repo.. i.e you have 5 minutes to delivery the bond or the trade is mutually broken… became a part of the goverment marketplace as a result of the CBOT Delivery squeeze ..

But that incident… funny didn’t provoke a major upset then… brings up the key point..
In trading Government securities.. cash.. is merely an accounting item.. the other side of the “repo”…
If i do a repo with some one.. he gives me cash… i give him a security.. the transactions is really a forward ….i give him cash today.. and he promises to give me the cash back tomorrow if I give him back the Bond…
The rates of interest as always in a repo/reverse repo has little or nothing to do with the risk free rate.. but is merely the credit spread.. or the scarcity premium for the particular asset.

Like the movie Casablanc.. people seem to be shocked that Repo rates are negative… but for years have seen nothing wrong with them being zero…?

By: Samik Nath

Samik Nath — Mon, 24 Mar 2008 06:45:46 +0000

Essentially it may depend on initiating counterparty. The cash loan interest accrual - treasury accrual = fee for a repo. Now, cash is the king! It is safest! So cash loan (unsecured) should be higher. So repo fee is always +ve.

The -ve repo seems to be absurd as it brings about the conjecture that cash holding risk is (say) +ve, and treasury holding risk is 0! Oops 1! Also, from here we may infer (if we dont know cash is cash and treasury is treasury, if they are merely A and B) treasury is more liquid than cash! Oops 2!

Now let’s think about who is interested party between Fed and Banks-consortium. Looks like Fed is overly interested in Open market operation. So they need treasuries badly than cash. They want to give away cash in return of Treasuries….economic “crowding-in” as opposed to “crowding-out”…. increase money suppy and reduce treasury bond supply … and Fed is so eager to that for a period of three months, that it set the T-Bill repo -ve.

By: David Merkel

David Merkel — Thu, 20 Mar 2008 15:52:01 +0000

Thanks. Fascinating, and likely correlated with the fails.