ICMA’s European Repo and Collateral Committee (ERCC) has published its annual analysis of how the repo market performed over the recent year-end: The European repo market at 2023 year-end.
Year-end repo market pricing and liquidity are generally a focus of market attention, with the euro market proving itself particularly vulnerable to significant dislocations in recent years. The ERCC has published a review of repo market performance and conditions over the “turn” of the year since the wholly unexpected and somewhat unprecedented extreme price moves observed in the euro repo market at 2016 year-end.
Following an expensive but relatively calm 2022 year-end, and a year of central bank ‘normalization’ of monetary policy, the 2023 turn was never expected to be as problematic as previous year-ends, even with it being four calendar days in duration. In many ways, the interest was largely to see how ‘normal’ the end of 2023 would be.
The report showed that, compared to previous year-ends, the 2023 turn for the euro repo market proved to be relatively unexceptional. While the market began pricing in around 250bp premium for German general collateral (GC) and 150bp premium for French GC back in October, this continued to erode as we got closer to the end of the year, ultimately trading around 60bp and 40bp rich respectively.
Non-core euro GC was even less spectacular, tightening by around 15bp. Similarly, the dispersion in rates for specials was relatively contained and largely in line with the moves in GC.
This relative calmness is attributed to a number of factors, namely: a reduction in the level of excess reserves; an increase in the supply of government bonds; general deleveraging and a lack of positioning by hedge funds; the collapse in the EUR-USD FX basis; and reduced pressure on bank intermediation arising from various regulatory reporting requirements.
The report also provides commentary and analysis of year-end for the sterling, dollar, and yen repo markets.