Why no mention of specials, which reverse the logic presented above?


《The demand for some specials can become so strong that the repo rate on that particular issue falls to zero or even goes negative in an otherwise positive interest rate environment. The repo market is the only financial market in which, historically, a negative rate of return has not been unusual.》

What if repo lenders are getting specials from the Fed, which they turn around and repo out for an additional profit?

Also, why no mention of rehypothecation?


《Rehypothecation is an alternative name for re-pledging. In the derivatives market, rehypothecation is sometimes called re-use. [...] Rehypothecation is regarded by prime brokers as essential to the economics of their business. In return for rights of rehypothecation, they can offer clients cheaper funding.》

Does rehypothecation allow both sides of a repo transaction to book a profit? Especially with specials and negative prices involved?

Is there a lot more going on in repo markets, which doesn't easily fit with zero-sum assumptions about money? If multiple sides can come away from a transaction booking a profit because they used different derivatives, does that pose a problem for standard economic scarcity assumptions?

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All good observations -- hopefully I can come back to these questions in future posts.

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