anyone got thrown off by this? can on the run UST be hot collateral? are we just supposed to ignore the type of collateral and as long as it’s indicated as hot, repo rate is lower?
on the run treasuries are the newly issued securities, so they tend to be more liquid…that’s why they’re considered hot…when you use hot collateral in a repo, the dealer demands it more, so theyre willing to provide a lower repo rate. I know we started a discussion on this not too long ago, any verdict on whether the above is correct?
I guess I am not really questioning whether Schweser is correct or not in this case - presume they are. I am obviously missing something wrt UST being hot. If it’s the most liquid, easily available security, not something that’s hard to get your hands on, then why would be considered hot?
its not the repo dealer’s job to get that security…It’s considered hot because if you were to take out a repo loan, and you had the choice of giving him some crap collateral or more liquid collateral, he will prefer the latter. Hence, he should pay for this “hotter” security by lowering his rate for you.
FYI, this question is in their errata (it’s pretty evident when you read their answer).
mp2438, i guess that sorta makes sense. skill, I can’t find this in errata. where are you seeing it? thanks
the errata only mentions that the word “availability” should be used, but the explanation is correct.
cheers
Long story short, Treasuries aren’t gonna get you a discount on the rate. The only collateral that will get you a discount will be “hot” or “special” collateral, which is in short supply and high demand.
look at it this way: new UST gets issued. a dealer ends up short the issue for whatever reason and has to make delivery or he will fail. the UST issue happens to be in short supply since investors want to own the new issue. Since the UST is in short supply and the dealers need to buy the issue or they will fail, the issue is considered on special or hot. You come along and happen to own some. the dealer is willing to give you a repo (lend you money) for a lower rate or even sometimes a close to zero rate in order to get their hands on the collateral you have.
sct123 Wrote: ------------------------------------------------------- > look at it this way: > > new UST gets issued. a dealer ends up short the > issue for whatever reason and has to make delivery > or he will fail. the UST issue happens to be in > short supply since investors want to own the new > issue. Since the UST is in short supply and the > dealers need to buy the issue or they will fail, > the issue is considered on special or hot. You > come along and happen to own some. the dealer is > willing to give you a repo (lend you money) for a > lower rate or even sometimes a close to zero rate > in order to get their hands on the collateral you > have. That’s an interesting way to look at it, but it’s simply incorrect. On the run Treasuries are never “in short supply” - you’re trying to justify an incorrect answer and most likely confusing people.
skillionaire Wrote: ------------------------------------------------------- > sct123 Wrote: > -------------------------------------------------- > ----- > > look at it this way: > > > > new UST gets issued. a dealer ends up short the > > issue for whatever reason and has to make > delivery > > or he will fail. the UST issue happens to be > in > > short supply since investors want to own the > new > > issue. Since the UST is in short supply and > the > > dealers need to buy the issue or they will > fail, > > the issue is considered on special or hot. You > > come along and happen to own some. the dealer > is > > willing to give you a repo (lend you money) for > a > > lower rate or even sometimes a close to zero > rate > > in order to get their hands on the collateral > you > > have. > > That’s an interesting way to look at it, but it’s > simply incorrect. > > On the run Treasuries are never “in short supply” > - you’re trying to justify an incorrect answer and > most likely confusing people. What is wrong with my answer? on the run UST are never in a short squeeze??? they never trade special??? I was trying to make the point of why one might be able borrow money in the repo market at a lower rate using hot collateral.
Actually its exactly correct. 10-year notes do it all the time as shorts build up against corporate issuance. Ask a repo trader if he’s never gotten squeezed on a Treasury. Around auction time when the short base builds up, the active issue goes special all the time. skillionaire Wrote: ------------------------------------------------------- > sct123 Wrote: > -------------------------------------------------- > ----- > > look at it this way: > > > > new UST gets issued. a dealer ends up short the > > issue for whatever reason and has to make > delivery > > or he will fail. the UST issue happens to be > in > > short supply since investors want to own the > new > > issue. Since the UST is in short supply and > the > > dealers need to buy the issue or they will > fail, > > the issue is considered on special or hot. You > > come along and happen to own some. the dealer > is > > willing to give you a repo (lend you money) for > a > > lower rate or even sometimes a close to zero > rate > > in order to get their hands on the collateral > you > > have. > > That’s an interesting way to look at it, but it’s > simply incorrect. > > On the run Treasuries are never “in short supply” > - you’re trying to justify an incorrect answer and > most likely confusing people.
thx tomsimons