NEW YORK, March 8 (Reuters) – The nearly US $ 3 trillion repo or reverse repo market, an opaque but vital component of the financial system, was turned upside down last week after the cost of borrowing the benchmark 10-year Treasury bill turned deeply negative on Thursday, hitting -4.25%, the lowest since mid-March last year.


The negative repo rate meant that some market participants were willing to pay interest on the money loaned to borrow the US 10-year note. Usually, the cash borrower usually pays the interest on the loan. On Monday, the average 10-year repo rate was -2.91%, according to brokers.

Analysts said the negative repo rate reflects uncertainty over how long the Federal Reserve can maintain its accommodative monetary policy.


Negative rates occur when there is a strong demand for a security that prompts lenders or repo buyers to offer cheap liquidity. Since 2018, the 10-year overnight rate has traded at -3.0% and below on three occasions: -4.25% last Thursday, -3.50% in June 2020 and -5.75 % in mid-March last year, said Scott Skyrm, executive vice president. president of fixed income and repo at Curvature Securities.


The cost of borrowing US 10-year bonds turned negative last week in the repo market following an increase in short positions in US 10-year bonds as expectations rose for a faster-than-expected US recovery . The market also worried that the Federal Reserve would raise interest rates sooner than expected.

To short sell the 10-year notes, investors must borrow them from entities, such as money market funds, in the repo market, sell them and buy them back later.

“I think what’s remarkable about all of this is how long it hasn’t been high volatility in the fixed income market like it is today,” said Glenn Havlicek, CEO and co-founder of broker-dealer GLMX.


In a repo transaction, a borrower offers US Treasuries and other high-quality securities as collateral to raise liquidity, often overnight, to fund its trading and lending activities. The next day, they repay their loans plus a generally nominal interest rate and collect their bonds. In other words, they buy back, or repo, the bonds.

The difference between the initial price of the securities and their repurchase price is the interest paid on the loan, called the repo rate.

Lenders typically include money market funds, insurance companies, corporations, municipalities, central banks, and commercial banks that have excess liquidity to invest. On the other hand, brokers and deposit-taking institutions borrow cash against long positions in securities to finance their stocks and balance sheets.


The repo market underpins much of the U.S. financial system, helping to ensure that banks have the liquidity needed to meet their day-to-day operational needs and maintain sufficient reserves.

It allows financial institutions that own many securities such as banks, brokers and hedge funds to borrow cheaply and allows parties with a lot of cash on hand like money market mutual funds to earn a profit. small return on this money without too much risk, because securities, often US Treasury securities, serve as collateral.


In general, the repo market has two types of rate: the general guarantee rate (GC) and the “special” rate.

The GC repo rate is the rate for a basket of securities that trade normally or have nothing special. GC securities can therefore substitute for each other without really changing the repo rate. In other words, the buyer in a GC repo is not really concerned with the type of securities they will receive.

The fact that GC securities can substitute for one another suggests that what determines the GC repo rate is not the supply and demand for particular issues of securities, but the liquidity requirements. For this reason, the GC repo is sometimes referred to as a cash repo. As a measure of the cost of borrowing cash, the GC repo rate is closely related to unsecured money market interest rates, analysts say. The interest rate charged on GC repo transactions generally stays close to the Fed’s overnight benchmark rate, currently set in a range of 0% to 0.25%.


A special issue is an issue of securities that is in overwhelming demand in the repo and liquidity markets, in this case the 10-year note, compared to similar issues. Competition to buy or borrow a special security prompts potential buyers to offer cheap money in return.

A special is therefore identified by a repo rate significantly lower than the GC repo rate. The demand for certain special offers can become so strong that the repo rate on that particular issue drops to zero or even becomes negative in an otherwise positive interest rate environment. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Nick Zieminski)