by Jeffrey Snider, Contra Corner:
There is so much about the repo market that gets lost in the minute details that are more often than not counterintuitive. It can sometimes be confusing as to why counterparties might be willing to pay you to borrow their cash, which is what a negative repo rate actually indicates. In that situation, which is what we are talking about of highly “special” securities, it is the actual security that is in demand far more than the cash. It is basic supply and demand dynamics just flipped over to the other side.
On that “other” side are those that are persistently “lent” out credit securities. In the “old” days before repo went ballistic (the 1990’s) those that would pay you to borrow their cash did so because they needed a particular security to close a short position. Shorting is essentially borrowing a security and selling it with the very real need to replace it in the future – and in a lot of instances at a time not of your choosing. So in that position, the need for a security is far greater than any need to generate a return on cash you are “lending”, to the point that you actually pay a negative interest rate.
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