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Jurassic


Total Posts: 348
Joined: Mar 2018
 
Posted: 2020-03-12 19:24
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


Total Posts: 205
Joined: Jul 2013
 
Posted: 2020-03-12 20:36
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.

"amicus Plato sed magis amica Veritas"

Jurassic


Total Posts: 348
Joined: Mar 2018
 
Posted: 2020-03-14 18:42
@rickyvic why are you funding it in the repo market? Why not just put up the cash?

tbretagn


Total Posts: 283
Joined: Oct 2004
 
Posted: 2020-03-15 22:08
@Jurassic Do you have $1bn you can give me? Cause I need to buy a bit of short dated bonds

Et meme si ce n'est pas vrai, il faut croire en l'histoire ancienne

Jurassic


Total Posts: 348
Joined: Mar 2018
 
Posted: 2020-03-19 19:05
@trbretagn i still dont understand :(

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

Kitno


Total Posts: 489
Joined: Mar 2005
 
Posted: 2020-03-19 20:10
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..?

All the soul of man is resolution, which in valiant men falters never, until their last breath.

nikol


Total Posts: 1073
Joined: Jun 2005
 
Posted: 2020-03-19 20:29
@Jurassic and @Kitno

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

Kitno


Total Posts: 489
Joined: Mar 2005
 
Posted: 2020-03-19 20:41
@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.

All the soul of man is resolution, which in valiant men falters never, until their last breath.

nikol


Total Posts: 1073
Joined: Jun 2005
 
Posted: 2020-03-19 22:52
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


Total Posts: 489
Joined: Mar 2005
 
Posted: 2020-03-20 00:20
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.



All the soul of man is resolution, which in valiant men falters never, until their last breath.

NeroTulip


Total Posts: 1071
Joined: May 2004
 
Posted: 2020-03-20 01:20
Repo is more widely used in govies: If you're trading a 20bps on the run / off the run spread, or putting on a 2s10s steepener, you're going to leverage 10-100x to make it exciting (well, that's what lots of traders do). You are going to get your leverage via repo. Not sure how much repo is used in corporates.

"Earth: some bacteria and basic life forms, no sign of intelligent life" (Message from a type III civilization probe sent to the solar system circa 2016)

Jurassic


Total Posts: 348
Joined: Mar 2018
 
Posted: 2020-03-20 09:07
@nikol the treasury bond vs future basis trade

nikol


Total Posts: 1073
Joined: Jun 2005
 
Posted: 2020-03-20 09:49
Massive +bond -futures basis repo-out bond (funding) will impact repo rates. Key is "massive" = high demand. PnL of this strategy depends on repo rate, hence the link. Also, if market goes one side it will put additional liquidity pressure.


@kitno maybe lets make another thread about ASW to discuss it thoroughly? It could be something like "CDS, TRS, ASW and all that stuff". Funding of the balance sheet could be in the center.

Kitno


Total Posts: 489
Joined: Mar 2005
 
Posted: 2020-03-21 23:08
@nikol, yes please. That would be helpful to many including me.

All the soul of man is resolution, which in valiant men falters never, until their last breath.

Jurassic


Total Posts: 348
Joined: Mar 2018
 
Posted: 2020-04-02 14:02
If i short the futures first, then I have the cash to buy the govt bond. Therefore, why do I need to enter the repo market?

Why did investors seeking security rush into futures? surely they would go for the cash product?

rickyvic


Total Posts: 205
Joined: Jul 2013
 
Posted: 2020-04-02 15:10
I am sorry for not replying to this earlier with all that happened.

asw like govie vs ir swap, futures cross like govie vs bond future, all same maturity.
If you put up the cash you have a really big balance sheet (you are a bank) while most agents dont have that, so they use prime brokers to access repo desks liquidity.
The rest has been explained but think about rates of instruments with similar default risk being heavily interconnected.

Future then you have the cash ? Look it up on the HULL.

Now the implication is that if there is an international sovereign crisis then there could be a default problem, because the whole world is flying to non risky assets, what if non risky assets become risky? They are already.



"amicus Plato sed magis amica Veritas"
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