RDP 2024-03: Demand in the Repo Market: Indirect Perspectives from Open Market Operations from 2006 to 2020 6. Conclusion

The demand for repo was relatively stable prior to the 2008–09 financial crisis and associated with a secured repo rate that was lower than unsecured rates. Precautionary demand rose during the global financial crisis and rates increased accordingly. Repo rates then declined again as market conditions settled but their spread to unsecured rates remained positive. Over the period between 2016 and 2019 there was a notable increase in both the demand for repo and its variability. This was reflected in high and variable repo rates that may have been linked to the emergence of basis trades in domestic securities and foreign exchange swaps.

We find evidence that as demand for repo rises and drives up the associated repo rate, at the margin market participants also become increasingly willing to acquire repo funding. One possible, although not exhaustive, explanation for this might be that as demand for repo funding of other investments rises, dealers become increasingly confident that they can either invest or on-lend such funding in larger quantities than when demand is lower. This conclusion is admittedly an inference drawn from Reserve Bank open market operations for the broader market and is subject to several important caveats. A useful area for future research might be to more formally link such investment opportunities to the demand and price outcomes we describe for the repo market.