June 25, 2015 — 6:00 PM EDT
As turnover in Denmark’s repo market shrinks, the fallout is spilling over to Europe’s biggest supply of covered mortgage bonds.
The $450 billion market, three times the size of Denmark’s government-bond market, provides as much as 70 percent of the liquidity buffers that Danish banks must hold to guard against capital markets freezing. It’s the one market that Denmark relies on more than any other to keep all financial transactions running smoothly and to provide affordable home finance. But it, in turn, relies on a healthy repo market.
“We are concerned,” Soeren Gade, deputy director at the Danish Bankers Association, said in an interview. “Liquidity in the secondary covered-bond market is created by the use of repos.”
That liquidity is under threat. Turnover in the Danish repo market fell to two-thirds of its normal level last year, according to data from the Danish central bank. It’s the first time since the global financial crisis hit in 2007 that repo transactions have been so thin, the data show.
Repos, short for repurchase agreements, are typically given against highly rated collateral to generate funds for short-term loans and cover temporary liquidity gaps.
The full article is available at http://www.bloomberg.com/news/articles/2015-06-25/liquidity-squeeze-hits-repos-in-denmark-as-market-makers-retreat