Expected Repo Specialness Costs and the Treasury Auction Cycle

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Research Papers

Expected Repo Specialness Costs and the Treasury Auction Cycle

March 1995 Number 9504

Author: Frank Keane

Repo rates for the most recently issued or "on-the-run" securities often diverge from general repo rates. The purpose of this study is to convey that relatively sizable divergences in repo rates for on-the-run issues are normal repeating events for the Treasury market, rather than evidence of abnormal circumstances. The costs associated with these repo market premia are small for short holding periods and are sometimes offset by gains from declining cash market premia for longer holding periods. Moreover, repo specialness costs seem small when considered against the alternative of not using the repo market.

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