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Negative Rates in Bilateral Repo Markets

Author

Listed:
  • Samuel Hempel

    (Office of Financial Research)

  • R. Jay Kahn

    (Office of Financial Research)

Abstract

Interest rates on repurchase agreements (repo) are crucial indicators of conditions in financial markets. This brief discusses negative rates in bilateral repo markets during 2021, and shows that they stemmed from two key sources: (1) broad factors that pushed down general collateral repo rates, and (2) narrower factors that pushed bilateral repo rates below comparable tri-party general collateral rates. Broad factors include increases in bank reserves and decreases in the supply of close alternatives to repo in early 2021. Narrower factors primarily concern demand for specific collateral in the bilateral market. Finally, the brief examines the effects of negative rates on the Secured Overnight Financing Rate (SOFR) and shows the existing construction of the SOFR successfully limits the impact of specific collateral demand on the reference rate.

Suggested Citation

  • Samuel Hempel & R. Jay Kahn, 2021. "Negative Rates in Bilateral Repo Markets," Briefs 21-03, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:briefs:21-03
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    File URL: https://www.financialresearch.gov/briefs/files/OFRBr_21-03_Negative_Rates_In_Bilateral_Repo_Markets.pdf
    File Function: First version, 2021
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    Citations

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    Cited by:

    1. Erten, Irem & Neamtu, Ioana & Thanassoulis, John, 2023. "The ring-fencing bonus," Bank of England working papers 999, Bank of England.
    2. Kahn, R. Jay & McCormick, Matthew & Nguyen, Vy & Paddrik, Mark & Young, H. Peyton, 2023. "Anatomy of the Repo Rate Spikes in September 2019," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 5(4), pages 1-25, July.

    More about this item

    Keywords

    Repurchase agreement; repo specials; financial markets; reference rate;
    All these keywords.

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