The Bank of England‘s blog, Bank Overground published some very interesting internal analysis yesterday on the Gilt Repo Market in the UK.. Read the article here: https://lnkd.in/equtqAP8

“How has the changing cash-collateral backdrop affected repo markets?”

The dynamics of global repo markets have undergone significant shifts in recent years, with sterling repo rates consistently trading above Bank Rate since September 2023. This divergence reflects a changing cash-collateral balance driven by falling reserve balances and an expanding pool of government bond collateral.

Repo markets are the lifeblood of financial liquidity, facilitating the movement of cash and securities across the system. In the UK, gilt repo plays a crucial role in supporting the gilt market, ensuring short-term liquidity and efficient collateral management. But what’s behind these recent changes?

Since February 2022, UK reserve balances have fallen by £250 billion, influenced by quantitative tightening (QT) and the unwind of the Term Funding Scheme. At the same time, gilt issuance has surged, increasing the free-float of UK government bonds by £500 billion. This shift has transitioned the market from a period of ample reserves and scarce collateral to one of plentiful collateral but declining reserves.

As a result, repo rates globally, including sterling General Collateral (GC) rates, have moved higher, settling above Bank Rate in the UK. This reflects a recalibration of supply and demand dynamics, where cash is less abundant, but collateral is more readily available.

Interestingly, this evolving backdrop has had knock-on effects, such as the reduction in “specialness” premiums for specific bonds. The Bank of England’s Short-Term Repo (STR) facility has also seen increased use, reaching £46.7 billion in October 2024, demonstrating its role in supporting market functioning and interest rate control during this transitional period.

Yet, the repo market remains resilient, even amid challenges such as quarter-end rate spikes caused by balance sheet constraints. These spikes, while temporary, highlight the delicate interplay of cash and collateral in driving dealer incentives.

Looking ahead, market participants are preparing for potential year-end volatility, with forward-starting repo rates pointing to heightened overnight rates. However, these shifts underscore the adaptability and robustness of the repo market framework.

As we navigate this new era, understanding these dynamics is vital for market participants seeking to optimise liquidity and collateral strategies. How are you adapting to the evolving cash-collateral landscape? Share your insights below!

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