Interest rates

what are they

SOFR to Eurodollar, to Fed Funds, cross-currency swaps, commercial paper, term rates

they are also trailing

unsure and unsecured, the official policy rate of the Fed

overnight, interbank deposit system, it used to be a big market because of low reserves, with scarce reserves just because of payments banks needed to move funds around, they dont need to redistribute them as much intraday to meet their payment obligation

what is it used for today?

some banks still need to keep their cash in this interbank unsecured market for regulatory reasons

the fed did not pay interest on reserves pre-GFC, the reserves were not remunerated by the Fed

reserves had to be pretty scarce for rates to remain at a target equilibrium, natural rate that they earned was 0, that 3% FFR was a premium due to the scarcity of the reserves in the market

now the Fed pays 4.35% on reserves

even though reserves are much more plentiful, the market rate of reserves is much closer to that value, because the fed is paying interest on them

are government sponsored

so they cant earn IOER, they keep their cash as reserve in the Fed funds market, offer however much liquidity they have or they're willing to part with overnight, banks quote them some level that is lower than ioer that's that's a that's a good Arbitrage

Fed funds upper limit: 4.50%, Fed funds lower limit: 4.25%

Overnight reverse repo rate: 4.30%, Secured Overnight Financing Rate: 4.32%, Effective FFR: 4.33%, interest on reserve balances: 4.40%

banks want to

and post their assets as collateral

the reported numbers

are medians, around that there are dispersions

it creates

this bimodal behavior

eg. bny melon as a tri-party agent and the Fixed Income Clearing Corporation as a clearinghouse

melon provides custody and collateral monitoring for repo participants, FICC provides netting of transactions and central clearing, all the repos that go through those venues are more or less observable

a hedge fund goes to a dealer and they say they want to do an OTC dealer trade

they talk through a bloomberg chat and they do the trade on the dealers books

mainly processed by the 2 main central counterparties

it does not include any transactions with the federal reserve, so reverse repos coming into the fed or if the fed is doing repo operations that does not show in the reference rates, but they influence the rest of the market

it nets trades, there are many dealers that are members

it reduces the settlement volume, the members can cancel out trades that offset each other

Hedge Funds that are not dealers

can through the dealer execute netted trades as if they were members of FICC, the hedge fund's broker is effectively a member

market and set up an account with BNY mellon

and they lend cash repo or drain cash from the reverse repo facility they do it through those accounts, they are not included in the SOFR or reference rates

general vs specific collateral

if sb wants a repo to source a treasury, they usually want a specific treasury, on the runs or the cheapest to deliver issues, the most recently issued or the ones referenced by the futures contract

if you buy 10y Treasury future

they are short 10y Treasury future, they have to hedge that, there is a small number of securities that are deliverable into those futures, theres usually the cheapest and the most favored by the contract to be delivered

just because

many people want to obtain it so they will sacrifice most of the yield on their cash in order just to get that specific security to use for hedging or whatever, it's called a special, that's the distinction between general and specific collateral repo

in the groupings of securities

general collateral baskets develop, note, bond, bill, floating rate note, strips are a seperate bucket, all of them are general

repo backed by german bunds

is not equivalent by repo backed by othe euro sovereign debt

borrow the expensive one, sell it

buy the cheap one, bet on converging

customer wants this specific bond from a dealer

they dont have it in the inventory

to manage the position they need to buy it from somebody else, close out their repo position with a different bond of the same issue

the other option is to keep rolling it, find somebody else in the repo market who wants to lend it them again, the third option is to borrow it from the fed, which has a lot of treasuries, and lends those treasuries out, through the soma facility

variable collateral, fixed rate, but

soma is specific collateral, but the rate moves up and down, repo rate for the on the run 2 year note

depending on how many bids are submitted, how much of the security of the fed has

how many dealers are bidding, and how much they need this security

dealers didnt have enough of them

volatile, relative value opportunities, they were bidding at a very high rate to obtain these, they can't bid below 5bps

cash is plentiful, collateral is scarce, ffr is higher is less affected

low sofr means a glut of cash

fra ois

based on libor, sofr spread vs libor, a measure of credit risk and liquidity in the banking system

treasuries should be lower, but

they should be about the same, swaps curve is the forward expectation of overnight rates

term premium

is not a directly observable quantity, you have to estimate it from regressions, what the expected rate of rolling something is vs buying the term rate

its not cheap

you are paying 10% of the max payout, the market does not think this is not an impossible event