White Paper on the Repo Market Affecting U.S. Treasury and Agency MBS
Independent Dealer and Trader Association
The goal of this White Paper is to foster a greater understanding of the unique role and perspective of independent, middle-market government securities dealers in the distribution and financing of U.S. Treasury and Agency mortgage-backed securities (“MBS”). As the nation’s financing needs increase – now approaching $1 trillion in net new issuances annually – diverse, deep and liquid markets for U.S. Treasury and Agency MBS are even more critical for the economy. During the drafting of this White Paper, the Federal Reserve Bank of New York (“FRBNY”) was forced to begin, for the first time in roughly eight years, injecting tens of billions of dollars of liquidity into the U.S. repurchase agreement funding market (“repo market”) to ensure sufficient liquidity for normal repo operations. This temporary fix, though, is just that – temporary – and there needs to be a greater sense of urgency in addressing the breadth, depth and diversity of repo market liquidity.
This White Paper seeks to illustrate how market trends since the financial crisis have led to an increase in concentration, and a decrease in the diversity and depth, of the repo market. Symptoms of this shift in concentration include rate volatility and higher funding costs, as recently witnessed in mid-September 2019. This combination of volatility and higher funding costs can have significant repercussions for the primary market, as key, buy-side market participants could find it too costly and even unprofitable to finance purchases of U.S. Treasury and Agency MBS. If these market participants retreat from the market, only central banks and the Federal Reserve will be available to provide support for the primary and secondary markets. Allowed to continue unabated, these trends could challenge the government’s ability to efficiently underwrite the national debt.
The full paper is available at https://www.idtassoc.com/news