Repo rates globally have ticked higher over recent years, and since September 2023 sterling repo rates have consistently traded at a positive spread to Bank Rate. This largely reflects the evolving landscape in which reserves balances are falling and the available stock of government bond collateral is growing.
This post from the Bank of England’s (BoE’s) blog “Bank Underground” focuses on gilt repo. In the post, BoE researchers noted that the past two year-ends have been out of line with history, with a limited spike observed in repo rates. Given the moves seen over quarter-ends globally over 2024, there may be a more prominent move in global repo rates at year-end which may result in an overnight GC-BR spread greater than that observed at the last quarter-end (17 basis points GC-BR spread in September 2024).
This is consistent with current pricing implied by forward-starting repo rates across several jurisdictions, with elevated overnight repo rates anticipated by market participants over the year-end turn. These repo rate spikes do not indicate structural cash scarcity, are historically temporary, and don’t tend to spill over into unsecured rates.
Market participants prepare ahead of time by ‘terming-out’ their funding and collateral to avoid having to trade over this period and be subject to spikes in the repo rate. During this period, there may be less of an incentive for participants to use the STR to source funding, as firms may seek alternative sources that allow for balance sheet netting or use internal channels to deploy collateral which may be temporarily more attractive. Once these temporary effects unwind, there are expectations to continue to see the STR operating as intended.