hard · Frm Part 2 Liquidity & Treasury Risk
A bank funds USD assets via 3-month swaps. If the 'Specialness' of a specific US Treasury bond increases (repo rate falls below GC), how does this theoretically affect the cost of borrowing USD against that bond in the repo market relative to the FX swap market?
- Both repo and FX swap rates must fall by the same amount.
- The FX swap basis will automatically move to offset the repo specialness.
- Repo becomes cheaper, potentially making FX swaps look relatively more expensive.
- Repo becomes more expensive because specialness implies scarcity.
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