Inte tillgängligt på svenska
Andrea Poinelli
- 3 November 2026
- WORKING PAPER SERIES - No. 3305Details
- Abstract
- The functioning of sovereign bond markets is closely intertwined with repo markets, where investors finance long positions and source bonds for short sales. We show, theoretically and empirically, how conditions in the cash bond market fundamentally shape repo rates: When demand for cash bonds exceeds available supply, arbitrageurs, notably hedge funds, step in to bridge the gap by shorting bonds and borrowing them in the repo market. These arbitrage strategies drive a wedge between monetary policy rates and repo rates, generating “specialness”. To investigate the drivers of investors’ demand for repo contracts, we obtain regulatory data covering the entire universe of repos backed by German sovereign bonds. We identify the ultimate borrowers and lenders of securities and estimate their demand and supply elasticities for the repo market. Supply, dominated by the public sector, accounts for 87% of the aggregate elasticity. Demand, driven mainly by hedge funds, is strongly inelastic: a 10% increase in borrowing costs reduces their borrowing by only 1%. Despite being among the most price-elastic investors in cash bond markets, hedge funds are inelastic in repo markets because their bond borrowing bridges the preferred-habitat demand in the cash bond market: their elasticity is inherited from their cash-market counterparties rather than being a primitive. As a result, repo rate specialness emerges as the equilibrium price reflecting demand pressures in the cash bond market, of which collateral scarcity from central bank purchases is a special case. Consequently, the same cash bond market imbalances affect both the pricing of safe assets and repos, two markets that are of crucial importance for the transmission of monetary policy.
- JEL Code
- E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 15 January 2025
- WORKING PAPER SERIES - No. 3013Details
- Abstract
- Flexibility has progressively become a distinctive feature of the implementation of the Eurosystem’s asset purchases. In its many manifestations, flexibility has also been used by asset managers in the daily selection of sovereign bonds to limit the impact of asset purchases on repo market specialness. This study shows that, since the inception of the Public Sector Purchase Programme, flexible purchases of bonds greatly mitigated the Eurosystem’s footprint on the repo market.
- JEL Code
- E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G10 : Financial Economics→General Financial Markets→General
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation