The International Capital Market Association’s (ICMA’s) European Repo and Collateral Committee (ERCC) published its annual analysis of how the repo market performed over the recent year-end.
The 2022 euro “turn” was being discussed as early as the summer, with underlying concerns related to the ongoing situation of excess liquidity in the banking system, scarcity in some collateral (notably German government bonds), and seasonal curbs on repo market-making capacity. By late September, the implied repo rate for German collateral over the three-day turn was somewhere between ESTR-800bp and ESTR-1,000bp, prompting many stakeholders to raise concerns publicly as well as with the ECB.
The report shows that pricing over year-end improved significantly in the weeks leading up to the date, and by December 28, German collateral (both general collateral and specific collateral) averaged around ESTR-350bp (with some specials trading wider than ESTR-400bp), French collateral around ESTR-290bp, and Italian collateral around ESTR-195bp. Perhaps the biggest surprise was Spanish collateral, which had become trickier to source going into December, and which averaged around ESTR-300bp over the turn.
There are several potential factors that helped to contain the extent of the year-end repo market price dislocation. These include: the October announcement of the Deutsche Finanzagentur that it would make available on repo an additional €54 billion of German government bonds, across 18 ISINs; the increase in the ECB’s borrowing facility against cash from €150 billion to €250 billion; and the large repayment of the Targeted Long-Term Refinancing Operation on 21 December. The report noted that the fact that positioning for year-end began as early as August also needs to be considered.
Some of the widening in repo pricing is still significant, particularly when compared to year-end pricing in other markets. It is also important to remember that the pricing levels cited in this analysis relate to the interbank (primarily centrally cleared) market, noting that pricing for end investors, in many cases, will have been even more extreme.
Despite original fears that sterling repo rates could move sharply lower in response to significant amounts of cash being placed at the very short end of the curve, volatility was relatively benign over the date, and, if anything, collateral was better offered. A number of factors seemed to have contributed to reducing any reserve-collateral disequilibrium, including an increase in term reverse repo activity, net positive issuance, quantitative tightening, and a positive FX basis.
The US repo market saw a record uptake in the Federal Reserve’s overnight RRP (over $2.5 trillion), which helped to ensure a smooth and uneventful year-end.
The change in Bank of Japan monetary policy prior to year-end seemed to have caught the market off guard. However, while term JGB repo rates tightened over the turn, particularly for specials, the overnight rate remained relatively stable.