Question: Availability of collateral is limited, why will resulting into the repo rate to be lower? Is that indicate the lower liquidity of collateral, the lower the repo rate? thanks
if availability is limited, sometimes lender may have to settle something that’s set for delivery for another deal, that’s how schwesser explains it. I don’t think it has anything to do with liquidity, that’s the quality of the collateral.
If the collateral is limited, dealers are looking to get it. In a “normal” repo you buy a security and borrow the money to buy it from a dealer. The dealer then asks you to post the security as collateral (basically you give it to him to hold). Let’s say the normal short term borrow rate is 5.00%, so you borrow the money at 5.00%. Now this collateral becomes scarce (the dealer is short and cannot find it to deliver into other commitments). The deal may say for certain collateral that if you post that scarce collateral to him, he will lend you the money at 4.75%. If the collateral becomes really scarce and dealers are all short it, they may let you borrow for zero (ie the repo is zero). Its rare, but I have seen this happen.
I believe this means is “scarce” - i.e. security in circulation is low. Due to the collateral being scarce, repo dealers are taking a lower repo rate to compensate for the same.
…look @ that collateral that has limited availability as having “scarcity” value, so that it improves the collateral value and reduces the repo rate…