Pensions prices turn negatively as fail penalty debuts Source: Bloomberg May 1, 2009 In a pension contract, a party secures securities in exchange for cash; in a reverse buyback agreement, the opposite happens. If a guarantee is not provided as promised, the unseeded trade is classified as a failure. The Generalcollateral Repo satz opened today on the market supply side, with the price listed for immediate sale at 0.35 percent, according to GovPX. The key interest rate opened at 0.21875 per cent. The Fed`s official target rate for overnight lending between banks has been between zero and 0.25 per cent since December. Securities that can be borrowed on the pension market at rates close to the Fed`s target rate are called general guarantees. The most in-demand bonds and bonds, such as the five-year bond issued today, are described as «special» by traders, since the interest rates on loans secured by these securities are lower than the general security rate. Session 3 Pension and Inversion Markets Chapter 5. What is a repo agreement?. A repurchase agreement is a contract in which a security is mortgaged as collateral with an agreement on the initiation date in order to cash the guarantee at a higher price at a later date set by the contract. Buyback rates are negative as fail penalty debuts Source: Bloomberg May 1, 2009 Interest rates on loans and loans to government bonds of $7 trillion have fallen below zero as a fine of 3 percentage points came into effect for the first time. The previous five-year, the 1.75 per cent maturity due in March 2014, was now traded at the lowest redemption or pension rate, falling as low as a negative point of 1 percentage point. The price closed down 0.05 percent, according to GovPX Inc., a unit of ICAP Plc, the world`s largest inter-dealers broker.
A negative pension rate means that investors who borrow money in exchange for government bonds as collateral actually pay interest instead of receiving it for the money they borrow. «Repo rates have gone negative because we have the new fees,» said Joseph Abate, a New York money market strategist at Barclays Capital Inc., one of 16 primary traders that trade directly with the Federal Reserve. What is a repo agreement? A repurchase agreement is a contract in which a security is mortgaged as collateral with an agreement on the initiation date in order to cash the guarantee at a higher price at a later date set by the contract. In Figure 5.1, we illustrate a repo operation. Institution X provides a treasury order with a market value of $1,000,000 to Institution Y, which provides Institution X $1,000,000 in cash (first transaction or opening stage in the figure). For simplicity`s sake, we assume that the Treasury order sells for nominal money. On the same day, Institution X agrees to buy back the same security from Institution Y the next day (overnight) at a price of USD 1,000,138.89 (closing transaction that takes place the next day). Reshout Operations The price at which Establishment X accepts the repurchase was determined as follows: the implied interest rate is 5%, and this is determined by market forces.
GC-Repo rate relative to fed funds effective rates – There are significant differences between The interest rates of Fed funds and GC-Repo rates. Fed fund rates apply to the reserve market and therefore to deposit-taking institutions that have to bear reserves. GC repo rates apply to repurchase transactions by a much larger group of participants, including deposit-taking institutions. The Fed`s fund rates apply to transactions that are not guaranteed. But as we have seen, pension rates apply to transactions guaranteed by a category of guarantees.