Repo Rate Patterns for New Treasury Notes

Abstract

Despite the enormous popularity of the market for repurchase agreements, the behavior of interest rates on “repo ” transactions is not well understood. An analysis of new data for 1992-95 reveals that repo rates on recently issued Treasury notes rise and fall in a regular pattern as the Treasury auction cycle progresses. In the past several years, the market for repurchase agreements—the “repo market”—has grown rapidly, achieving a daily trading volume in excess of $500 bil-lion. Securities dealers, corporate underwriters, money managers, and others routinely use the market as a tem-porary funding mechanism. Spurred by the need to finance inventories or fulf ill commitments to cus-tomers, these institutions enter the market to borrow money or securities for return at a later date. Despite the repo market’s size and popularity, infor-mation about basic market characteristics is surpris-

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