Working Paper

Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium

Abstract: We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%?90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, explicitly linked to the SC value of the highest-quality securities?recently-issued U.S. nominal Treasuries.

Keywords: Bond prices; collateral; interest rates; risk premia;

JEL Classification: E42; G12; G14; G32;

https://doi.org/10.21033/wp-2018-21

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2018-12-03

Number: WP-2018-21

Pages: 53 pages