Repo Rate Dynamics: The Role of Dealers, Hedge Funds, and Issuance

This paper analyses U.S. secured repo spreads by jointly looking into reserves, dealer balance-sheet usage, hedge fund leverage, and Treasury issuance. Using a quantile regression framework, the results show that repo market dynamics are strongly state-dependent. Higher level of reserves consistently compress repo spreads to the Federal Reserve’s overninght reverse repo offering rate and remain the primary stabilizing force, particularly in tighter funding conditions. Hedge fund activity appears to amplify dealer balance-sheet pressures in lower quantiles, reflecting the impact of leveraged demand in normal markets. As spreads rise, this effect weakens. Instead, heavier Treasury issuance appears to weigh on repo spreads via its stronger effect on dealer balance sheet pressures. Overall, U.S. repo spreads are affected by the supply of central bank liquidity, demand for leverage, Treasury issuance and intermediary capacity. Crucially, these drivers are not equally relevant across the distribution of funding conditions.