One of the best ways for RepoWatch readers to see what’s going on daily in the repo market during the U.S. debt crisis is the DTCC GFC Repo Index.
If you check the DTCC index now, you will see that average rates on repo loans collateralized with Treasuries, though still low, were six times higher on Thursday than they were on Monday. You’ll also see that the volume of repo loans collateralized by Treasuries has been trending down since March.
Clearly, the flow of credit is tightening, given that until recently Treasuries were securing about two-thirds of the U.S. repo market, and it’s the restriction in the flow of credit that causes the kind of crisis we had in September 2008.
The problem in making sense of this data, though, is context. At what point are the repo rates too high? At what point will repo lenders withdraw completely from the market? Is volume lower lately because lenders are afraid of Treasuries, or because everyone is hoarding them, or because there are fewer Treasuries on the market? We don’t know.
If we look at levels reported during the 2008 crisis - even if we had good data, which we don’t – we wouldn’t learn much, in part because three years ago traders were fleeing to Treasuries, not away from them.
Meanwhile, the Office of Financial Research, which was created by the Dodd-Frank Act to collect and dessiminate this kind of critical data, hasn’t even decided what data to collect.
Later in this post, I’ll talk more about ways to track the repurchase market. But first, let me say that RepoWatch agrees with Fitch Ratings’ July 27 report, which said:
Over the near-to-medium term, in a moderate downgrade scenario (for example, to AA), U.S. Treasuries would likely retain their standing as the benchmark security that anchors global fixed-income markets, given their unparalleled liquidity, unique role in the financial system, strong credit profile, and lack of a viable alternative.
Let’s face it. With $9.3 trillion in Treasuries out there, with many being used by governments, financial institutions and corporations as collateral for repo and derivative transactions, and with no alternatives in sight, is it believable that a rating downgrade would make them unacceptable as collateral for repo loans? No.
Of course, if August drifts away and Congress and the President are still dithering, that’s another story.
Now, some information about watching the repurchase market.
The best place to watch is undoubtedly on a Bloomberg computer screen. But the Bloomberg service costs thousands of dollars.
Other sources for timely information include the Depository Trust & Clearing Corp. (DTCC), the Wall Street Journal online, Bloomberg News, and primary dealers. More about these below.
Sources such as tri-party repo, Securities and Exchange Commission filings, the Federal Reserve’s Flow of Funds and the European Repo Council are less timely. See Repowatch’s last DataWatch report for information about these.
First, it’s useful to know that the health of the repo market can be gauged two main ways, by the repo rate and by the haircut.
The repo rate is the annual interest rate that the lender charges the borrower. It is based on the amount of money loaned. If RepoWatch Bank lends you $10,000 for one day and charges you 0.132 percent interest – which is the most recent rate DTCC is reporting for Treasuries - tomorrow you owe RepoWatch $3.67 ($10,000 x 0.132 percent ÷ 360 days) plus the original $10,000.
The haircut is how much the value of the collateral exceeds the amount of the loan. For example, if RepoWatch Bank lends you $10,000, it might demand that you give RepoWatch $10,100 in Treasuries to secure the loan. If you pay off the loan on time, you get the securities back. The haircut is $100, or 1 percent of the loan.
When repo lenders get nervous, they may raise the rate, the haircut or both. In our example, if you want to renew your $10,000 loan tomorrow, a nervous RepoWatch Bank may set the rate at 0.135 percent and demand that you put up $10,200 in Treasuries as collateral this time. If you don’t have enough Treasuries, you may have to sell other holdings to get them, driving down the value of those holdings and starting a downward spiral of values in the financial markets as happened in 2008.
To RepoWatch’s knowledge, there’s no formal source of timely information about haircut levels. The tri-party market reports haircuts on a monthly basis.
Hopefully, business editors at major news organizations have assigned reporters to gather this information throughout the crisis, from repo desks at the country’s major financial institutions.
Sources for timely information on repo rates include:
Depository Trust & Clearing Corp.: New York-based DTCC, which provides clearing, settlement and information services for the financial markets, reports daily volume and rates for general collateral repos secured with U.S. government securities. General collateral repos are a major portion of the market because they will accept any kind of qualified security as collateral, rather than requiring a certain security. For the data behind the DTCC charts - that is, the record of daily rates and volumes back to August 2010 - click on the download.
By the way, note in the DTCC chart of repo volumes that market participants are using less Treasury collateral than Fannie Mae and Freddie Mac (“MBS”) collateral this month, even though a repo loan secured by Treasuries is less expensive. Is that because lenders are reluctant to take Treasuries, or because market participants are hoarding Treasuries as they sometimes do in rough waters, or because the Treasury is issuing fewer securities and there’s a shortgage? RepoWatch has asked DTCC this question and will update this post with the answer when it arrives.
Bloomberg News: Search Bloomberg for its latest repo reports. These are stories with analysis. Also check out ICAP I-Repo Indices, which shows the daily repo rate and volume for general collateral repos as reported by London-based ICAP, an interdealer broker.
Wall Street Journal: The Journal reports overnight repurchase rates for general collateral repos, but no volumes. The Journal site also has historical data going back to May 2007. You can see, for example, that on Sept. 29, 2008, when Congress refused to give Treasury Secretary Henry Paulson the $700 billion he wanted, and financial markets fainted, the overnight repo rate in the U.S. was 1 percent, down from 1.88 percent a week earlier and 4 percent at the beginning of the year.
Primary Dealers: Primary dealers are 20 broker-dealers approved to do repurchase transactions with the Federal Reserve Bank of New York. RepoWatch believes they represent about half of the U.S. repurchase market. (Update: In June 2012 New York Fed economists said primary dealers represent about 90 percent of the U.S. repo market.) Their weekly reports on volume, which seem to be the largest and oldest regularly-reported dataset for repo, is available electronically back to July 1994. RepoWatch features this data on its home page chart.
To find the most recent data on the Primary Dealers site, scroll down to Weekly Release of Primary Dealer Transactions and click on the Excel document. Then click on sheet 4 for repurchase volumes. To get the historical data, click on the historical data statistics search.