Bloomberg Law: UK pushes back on speculation for change to repo market backstop

  • Repo guidance tweak causes traders to brace for extra costs
  • DMO says does not indicate possible change to terms in future

The UK’s Debt Management Office (DMO) pushed back on speculation that a bond market backstop designed to alleviate gilt scarcity may soon become more expensive to use.

Concern that the Standing Repo Facility, which allows dealers to borrow hard-to-source gilts, might become costlier has helped short-maturity bonds outperform comparable interest-rate swaps by the most since September this week, according to NatWest Markets. The speculation was driven by a change in the DMO’s guidance after the Bank of England’s interest-rate hike last month.

The DMO announced on 22 June  “an amendment to the terms under which its Standing Repo Facility will be available to its regular Gilt-edged Market Maker dealing counterparties, following the rise in the Bank of England’s official Bank Rate, announced earlier today.

“With immediate effect, the rate applicable to borrowing gilts under this Facility will become 4.25% (previously 3.75%). Lending under this Facility will normally also involve an overnight, back-to-back cash neutral reverse repo GC trade executed at the Bank of England’s Bank Rate (currently 5.00%).

“On 16 June 2022, the DMO signalled its intention to maintain the differential between Bank Rate and the Standing Repo Facility rate at a spread of seventy-five basis points (0.75%). However, the DMO is currently reserving its right to keep this policy under review and to revise this or other Terms and Conditions of this Facility at any time, including in the light of prevailing interest rates, market conditions and/or market practices.”

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