Special repo rate

For an account of the impact of special repo rates on term structure modelling see Barone and Risa (1994) and Duffie (1993), which are available from the respective institution Web sites. 

Barone, E., Risa, S., 1994. Valuation of Floaters and Options on Floaters Under Special Repo Rates. Institute Mobiliare Italiano, Rome. 

Duffie, D., 1993. Special Repo Rates. Stanford University, Graduate School of Business, Stanford, CA. 

A special repo rate is below the general repo rate. The repo market is described in Chapter 10. 

January 2009 bond, the 10-year benchmark and also the cheap-est-to-deliver (CTD) issue for the March 1999 Bund contract. However, it was not the CTD bond after expiry of June 1999 contract, and the extent of specialness declined after this point. Interestingly, this bond remained in the delivery basket for subsequent contracts and its special status fluctuated. Arbitrage traders, who wish to exploit the repo rate differential between benchmark and off-the-run issues and GC and special stocks, are active participants in the Bund repo market. 

TR swaps may also be used for speculation. Bond traders who believe that a particular bond not currently on their books is about to decline in price have a couple of ways to profit from this view. One method is to sell the bond short and cover their position through a repo. The cash flow to the traders from this transaction consists of the coupon on the bond that they owe as a result of the short sale and, if the shorted bond falls in price as expected, the capital gain from the short sale plus the repo rate—say, LIBOR plus a spread. The danger in this transaction is that if the shorted bond must be covered through a repo at the special rate instead of the higher general collateral rate—the one applicable to Treasury securities— the traders will be funding it at a loss. The yield on the bond must also be lower than the repo rate. 

During 2002 Bund GC traded in a range around 2-10 basis points below EURIBOR in the short dates, while on occasion trading in specials went down to 90 basis points below the GC rate. As in other markets, there are a number of reasons why government stocks become special in the German market however, the primary factor is the extent of its deliverability into the Bund futures contract. For illustration we show, in Exhibit 10.23, the spread below GC for repo in the DBR... 

Jumbo issues generally trade with the euro overnight rate (EONIA), although the smaller-sized issues sometimes go special. The offered side in repo is dominated by investment funds and the mortgage bank issuers themselves. 

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