Repo discussion… “Tabler chimes in that the strategy’s interest cost could be reduced by using hot collateral such as on-the-run US Treasuries.” Treasuries are high quality therefore the repo rate goes down. But he doesn’t say hiqh quality, he says, hot collateral… that is collateral that is in high demand/limited availability, and therefore also decreases the repo rate. So are on-the-run Treas hot with limited availibility? Isn’t the on-the-run highly liquid/high availibility, off-the-run trade with a liquidity premium/not so available? So is Table incorrect? I would go correct if he said using high quality such as on-the-run US… or using hot collateral such as enriched uranium… but not hot and Treas or high quality and uranium? right? Your answer: A was incorrect. The correct answer was C) Both Morrison and Tabler are correct. There is a positive relationship between the federal funds rate and the repo rate. The use of collateral with limited ability decreases the repo rate. Furthermore, as credit quality and liquidity increase, the repo rate declines. As the term decreases, the repo rate decreases. Lastly, the repo rate will be lower if the collateral is delivered to the lender, rather than to the borrower’s bank.
I agree with you, slouscar. I wouldn’t consider on-the-run Treasuries a hot collateral.
on-the-run Treasuries is like raw real estate - they ain’t making any more of it. Err, wait…