Exclusive-German finance agency ups repo market activity to ease collateral scarcity – source

Germany’s finance agency has stepped up its participation in the repo market in recent days to alleviate a shortage of debt used as collateral that sharply raised the cost of borrowing the country’s bonds, a market source told Reuters.

The finance agency usually retains a small amount of government bonds it auctions and uses them for repo transactions and to lend bonds to investors and can increase such operations to support the functioning of markets.

The source said participation was slightly lower than “significant” levels seen at the end of last year when the agency, which manages Germany’s debt, had stepped in to ease a similar squeeze on collateral.

The person did not specify the size of activity or how long the increased participation would continue.

Responding to a request for comment, a finance agency spokesperson said the agency “provides significant support for liquidity in the repo market in order to ensure the functioning of markets for German government securities”.

“A liquid repo market facilitates market making and position taking in the cash and future markets,” the spokesperson added.

Repo markets are crucial to the functioning of the financial system with recourse to safe government debt an integral part. In repo trades, lenders offer cash to borrowers, often overnight, in exchange for collateral in the form of high-quality securities.

FALLING REPO RATES

The German agency’s move comes after repo rates for trades using German government bonds as collateral across BrokerTec and MTS platforms plunged to as low as -0.99% last Tuesday from roughly -0.80% a month before, according to RepoFunds Rate data.

That has been driven by some bonds seeing exceptional demand. Trades requiring specific bonds — dubbed “specials” — the rate on RepoFunds Rates’s index had fallen below -1%, well below the roughly -0.6% rate on general collateral trades, a sign of scarcity.

But by Friday’s close, the broad rate had risen to -0.85%, RepoFunds Rate’s data showed.

“We have seen some easing in the scarcity in the repo market so that the rates are rising again,” said Rene Albrecht, strategist at DZ Bank.

The collateral squeeze was blamed partly on investors dashing to repo markets to borrow German bonds to ‘short’ the debt, following a hawkish turn by the European Central Bank earlier this month.

“Although bonds trading special is a normal occurrence in the repo market, this has been seen more recently due to short positioning from the market to take directional risk and participants taking advantage of market opportunities,” said Kate Karimson, head of European repo at trading platform BrokerTec.

The Russia-Ukraine crisis has also boosted demand for safe-haven German bonds, exacerbating the scarcity in a market where the ECB already holds nearly a third of outstanding debt.