Repurchase Agreements with Negative Interest Rates

Abstract

Contrary to popular belief, interest rates can drop below zero. From early August to mid-November of 2003, negative rates occurred on certain U.S. Treasury security repurchase agreements. An examination of the market conditions behind this development reveals why market participants are sometimes willing to pay interest on money lent. S hort-term interest rates fell to their lowestlevel in forty-five years in 2003. The low rates,coupled with a sharp increase in intermedi-ate-term yields during the summer, gave rise to significant settlement problems in the ten-year Treasury note issued in May. To ease those problems, market participants lent money at attractive rates on investment contracts that pro-vided the note as collateral. From early August through mid-November, such repurchase agreements (“repos ” or “RPs”) were sometimes arranged at negative interest rates. This episode of negative interest rates is interesting for several reasons. For one, it refutes the popular assumption that interest rates cannot go below zero because a lender

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 23 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.