Listen now | The repo market is the oil that lubricates the engine of global financial markets - let's explore it in this article of the Bond Market 101 Series.
Alf continues to embarrass paywalled investor ‘education’ competitors. A missing piece of this thread is basis trading at hedge funds (futures vs cash) and how important this leveraged short term demand is for balancing the repo market and its contribution to stress episodes…
In a recent interview, Zoltan Posar commented that many players in the repo market have replaced their repo activity with FX swaps instead. Can you please explain this.
Question: what is the difference between using the repo market vs. just selling the security and buying it back later on the open market? This also prevents issues with balance sheet expansion for repo borrowers. Is the repo market a solution to bid/ask spreads when trading securities?
Hey Alf - you said "redeploy the same security over and over again as collateral (re-pledging)."
How on earth can the same collateral be used over & over again? So if the borrower defaults, there will be many lenders attempting to claim the same security - this does not make sense!
Insightful primer. Wasn't the Great Financial Crisis ultimately a crisis of trust which is at the heart of Repo? Repo and reverse repo: might be useful to delineate. Nice series.
I'm confused by the QT example in 2019. If banks lend securities/borrow cash and their repo appetite dwindled after the Fed took away a bunch of their liquidity, then 1) banks should have wanted to be more active in the repo market to rebalance their UST/cash balance or 2) if that didn't happen, then their lower cash borrowing in repos should have been offset by higher cash borrowing needs by hedge funds. Either way, there's a hitch in the example somewhere or I'm really missing something. Love your work, thank you Alf.
Hi alf, it would be great to have a diagram with the players and the canals of flow of securities and cash, and how banks and central banks and offshore accounts interact with each other because it´s pretty complicated. I myself am a very visual guy and find it easier to see all the pieces interacting with one another in that sort of way. I understand that it wouldn´t be an easy diagram, but it would help!. George gammon does something of the sort in his youtube channel.
Thanks for sharing this kind of info! I wonder how the funds obtain by borrowers are used for. Is there a correlation between, for instance, high activity in the repo market and high speculation and expansion of Open Interests in agricultural commodities, or O&G futures? Thanks again
Thanks Alf. This is number 5 in your Bond Market 101 Series: The Bond Market in plain English, The Real Deal in the Bond Market, Yes, but which Yield Curve, The name is Spread. Credit Spread, and The World's Most Important Market. Thank you for continually educating us; much appreciated! I know things now that I didn't know in February, and, your Macro Compass Quadrant Credit Impulse graph is as equally helpful. Knowledge is power. :) Thanks again.
Alf what about going long schp or tips vs tlt. If rates go down on the long end still some gain but with inflation protection just less upside because of inflation yield decrease?
"This means their ‘‘cash’’ is nothing else than an unsecured bank deposit at a commercial bank - very little reward, quite some risk."
Alf, could you please clarify what exactly "unsecured" means? i.e. When companies or individuals deposit their money at commercial banks, are they taking "quite some risk", and why are they taking "quite some risk"?
Can you please explain with eg how hedge funds use leverage and make money in repo market , thanks
Alf continues to embarrass paywalled investor ‘education’ competitors. A missing piece of this thread is basis trading at hedge funds (futures vs cash) and how important this leveraged short term demand is for balancing the repo market and its contribution to stress episodes…
In a recent interview, Zoltan Posar commented that many players in the repo market have replaced their repo activity with FX swaps instead. Can you please explain this.
Hi Alf, thank you for this post.
Question: what is the difference between using the repo market vs. just selling the security and buying it back later on the open market? This also prevents issues with balance sheet expansion for repo borrowers. Is the repo market a solution to bid/ask spreads when trading securities?
Hey Alf - you said "redeploy the same security over and over again as collateral (re-pledging)."
How on earth can the same collateral be used over & over again? So if the borrower defaults, there will be many lenders attempting to claim the same security - this does not make sense!
You rock Alf, thankful for the insight and heart of a teacher
Insightful primer. Wasn't the Great Financial Crisis ultimately a crisis of trust which is at the heart of Repo? Repo and reverse repo: might be useful to delineate. Nice series.
I'm confused by the QT example in 2019. If banks lend securities/borrow cash and their repo appetite dwindled after the Fed took away a bunch of their liquidity, then 1) banks should have wanted to be more active in the repo market to rebalance their UST/cash balance or 2) if that didn't happen, then their lower cash borrowing in repos should have been offset by higher cash borrowing needs by hedge funds. Either way, there's a hitch in the example somewhere or I'm really missing something. Love your work, thank you Alf.
Hi alf, it would be great to have a diagram with the players and the canals of flow of securities and cash, and how banks and central banks and offshore accounts interact with each other because it´s pretty complicated. I myself am a very visual guy and find it easier to see all the pieces interacting with one another in that sort of way. I understand that it wouldn´t be an easy diagram, but it would help!. George gammon does something of the sort in his youtube channel.
Thanks for sharing this kind of info! I wonder how the funds obtain by borrowers are used for. Is there a correlation between, for instance, high activity in the repo market and high speculation and expansion of Open Interests in agricultural commodities, or O&G futures? Thanks again
Wow biggest fin on substack, big achievement, congrats! Thanks for keeping it publicly accessible!
Why is twitter/reddit constantly freaking out about the repo market?
Awesome - Thank You!
Thanks Alf. This is number 5 in your Bond Market 101 Series: The Bond Market in plain English, The Real Deal in the Bond Market, Yes, but which Yield Curve, The name is Spread. Credit Spread, and The World's Most Important Market. Thank you for continually educating us; much appreciated! I know things now that I didn't know in February, and, your Macro Compass Quadrant Credit Impulse graph is as equally helpful. Knowledge is power. :) Thanks again.
Alf what about going long schp or tips vs tlt. If rates go down on the long end still some gain but with inflation protection just less upside because of inflation yield decrease?
"This means their ‘‘cash’’ is nothing else than an unsecured bank deposit at a commercial bank - very little reward, quite some risk."
Alf, could you please clarify what exactly "unsecured" means? i.e. When companies or individuals deposit their money at commercial banks, are they taking "quite some risk", and why are they taking "quite some risk"?
Thank you for the content!