Repo and RV Rates Trades

Jurassic · Post by **Jurassic** » Thu Mar 12, 2020 7:24 pm

https://www.zerohedge.com/markets/here-what-was-behind-yesterdays-unprecedented-treasury-dislocation

"High demand for secured (repo) funding from non-financial institutions, such as hedge funds heavily engaged in leveraging up relative value trades," was a key factor behind the chaos, said Claudio Borio, head of the monetary and economic department at the BIS.

Could someone please explain the link between repo funding and rv rates trades?

rickyvic · Post by **rickyvic** » Thu Mar 12, 2020 8:36 pm

The reason of dislocation is liquidity imbalance.

When you put up a spread trade like a future cross, asset swap or curve trade you are funding it in the repo market if you are long or short the cash.

It is illiquidity that happens in those markets, in stressful situations supply and demand equilibrium changes or simply nobody is really providing deep liquidity so there is an imbalance.

This propagates to all the instruments that have a short term rates components.

I hope these are enough pointers for you to diagnose the situation.

Jurassic · Post by **Jurassic** » Sat Mar 14, 2020 6:42 pm

@rickyvic why are you funding it in the repo market? Why not just put up the cash?

tbretagn · Post by **tbretagn** » Sun Mar 15, 2020 10:08 pm

@Jurassic Do you have $1bn you can give me? Cause I need to buy a bit of short dated bonds

Jurassic · Post by **Jurassic** » Thu Mar 19, 2020 7:05 pm

@trbretagn i still dont understand ${L_SMILIES_SAD}$

does anyone know a good piece on the mechanics of this treasury bond vs future basis trade? Im struggling to understand it

Kitno · Post by **Kitno** » Thu Mar 19, 2020 8:10 pm

I must admit Jurassic I'm in your boat wrt one point @rickyvic made.

In an asset swap (par/par or yield/yield ASW) I am unaware why someone would ever be short the cash (bond) unless you are talking govy world (where things are a little different)? Unless you're being a bit slang and referring to the fixed (IRS) receiver i.e. an IR dealer in an ASW..?

nikol · Post by **nikol** » Thu Mar 19, 2020 8:29 pm

@Jurassic and @Kitno

Tip: If the whole market is in securities, what collateral can it put in in the time of devaluation?

Kitno · Post by **Kitno** » Thu Mar 19, 2020 8:41 pm

@Nikol I'm with you which is why I asked if govy (you wouldn't REPO an ASW'd cash corporate bond). I'm a credit guy so very likely to miss what you rates guys get up to.

nikol · Post by **nikol** » Thu Mar 19, 2020 10:52 pm

Kitno,

- I dont know how comparable ASW and Repo market in liquidity terms, but under periods of stress, traders might tap from both.

- Not sure, if ASW is relevant for the original question. ASW is sort of proxy of CDS, but, yes, it is an extension of repo.

Also, original question is out of context. Which RV strategy is meant? Bond-Equity of similar underlying? If this one, then the puzzle can be assembled. Here is intuitive picture: bond and equity markets are two-way views on the balance sheet of publicly traded companies. Under normal conditions their prices are anti-correlated because of opposite demand pressure coming from investors (both markets are sort of competing for investments). While under stress, like we have today, these markets should swap sign of correlation (corr > 0), so for the demands of repo (bonds, long-term) and SBL (equity, short term) and, hence, respective rates.

My answer could be wrong because of wrong understanding of question in the topic. Jurassic, clarify. It looks like only that question caused gap in your understanding and the rest is crystal clear to you.

Kitno · Post by **Kitno** » Fri Mar 20, 2020 12:20 am

I think I may be super stupid here. So, logic:

1. I am a real money credit guy. I like the credit product. I buy a credit p/p ASW, i.e. 10MM VOD 1.125% 3/2025.

I pay cash par flat of accrued for a bond whose clean cash price is 102.25 (dirty 103.05).

I enter into an off market IRS. Day 1 PV is 3.05% off market. I pay over the life of the IRS 3.05% away of par notional and rec a spread over 3m USD LIBOR. All's great. I pay fixed (bond coupons) to the IRS ASW dealer. I rec floating + ASW (par) spread.

As the ASW owner I could REPO the cash bond depending on if I am real/fast money - it's this bit I (kitno) have a problem. Real money credit guys typically didn't do this for many reasons.

@nikol, yes. ASW is a 'sort of' proxy to CDS but this is like 20y ago thinking TBH. ASW is more Z-spread risk vs ASW which is bpv off par notional and it ignores IRS ctpy risk/cash bond default risk.