When liquidity in repo markets becomes dislocated, market participants face severe risks in their ability to finance trading strategies or find appropriate returns on cash. As the market prepares for an expected increase in interest rates and spreads begin to widen, liquidity and transparency in the repo markets will be even more critical for participants.
DTCC Connection sat down with Brian Lane, DTCC Director of Fixed Income Product Management, to discuss why buy-side and sell-side firms alike find Treasury Kinetics repo data invaluable for better understanding and navigating this complex and evolving market.
Related: Finadium's Report on Navigating the U.S. Repo Markets
DC: Why is the U.S. Treasury repurchasing agreement market so significant?
BL: The U.S. repo market is an enormous and complicated – yet essential – part of the financial ecosystem. Today, on average, DTCC’s Fixed Income Clearing Corporation (FICC), through its Government Securities Division (GSD) matches, nets, settles, and risk manages repo transactions valued at more than $3.65 trillion per day.
The repo market supports liquidity in other markets, contributing to the efficient distribution of capital in the economy, causing investors to assume a particular risk profile, whether to borrow or lend. As the repo market continues to evolve and grow, increased volatility in this sector drives the need for market participants to access data that enables them to better understand valuation, rates, and liquidity.
DC: Does the market have enough information available today regarding repo markets?
BL: A central exchange for repo transactions or a single platform to understand the totality of the market doesn’t exist. There are several electronic platforms, some bigger than others, but none represent the totality of the market. Dealer to dealer (inter-dealer broker) trading is still a large segment of the market that not all electronic platforms capture.
With Treasury Kinetics, market participants have access to a single data source on repo trade activity which goes beyond the end of day average to a complete view of transactional activity.
DC: What role does FICC play in repo markets and how DTCC create Treasury Kinetics?
BL: FICC matches and nets repo transactions as part of its netting process for other government securities trading activity, including all buy/sell transactions and U.S. Treasury auction purchases. Dealers or inter-dealer brokers send their trades to FICC as part of the settlement process. While trading remains fragmented, all of the executed trade activity comes together in the clearing and settlement process. Treasury Kinetics looks at the matched Delivery-versus-Payments (DVPs), aggregates and anonymizes the trade data, and delivers it to subscribers.
FICC has a holistic view of activity going through those electronic platforms and dealer to dealer activity. We can give users a complete picture of this market to help them better understand what’s in their portfolio and how to value it and identify opportunities to trade in if they are not already.
DC: What insights can market participants gain from data available in Treasury Kinetics?
BL: With Treasury Kinetics, market participants have access to a single data source on repo trade activity which goes beyond the end of day average to a complete view of transactional activity.
Treasury Kinetics covers the various types of trades in the repo market, including overnight, forward overnight, term and forward term trades. Users can see how the markets react with our daily aggregations, and additional sub-aggregations split up over different time periods of the trading day. We split all the aggregations separately by trade type and allowing users to track rate changes based on the term of the trade.
The user can access metrics such as total volume, dollar amount of volume, number of trades, volume-weighted average rate (VWAR) on trades, and the interest rate agreed upon by both parties. The service also includes a concentration metric to help users understand the dispersion of activity, how many participants are in the market, and how costly it might be to make this trade.
Related: DTCC Launches Treasury Kinetics
DC: How can Treasury Kinetics help users during market volatility?
BL: Market participants can use Treasury Kinetics to better understand the rates, valuation, and liquidity of repo security positions in their portfolios or to research for future financing needs. The deep history of Treasury Kinetics allows users to understand how different bond types and/or durations have performed during times of market stress, such as the September 2019 rate spike on the onset of the COVID Pandemic and other historic events.
Back-testing with Treasury Kinetics data can help investors determine what they could expect to happen in another stressful period. Market participants can also better understand whether they should be trading in very short-term or longer-term bonds. In these extreme circumstances, the impact on those bonds can be a game-changer for some investors.
DC: How does a market participant use Treasury Kinetics?
BL: Users can include Hedge Funds with relative value investment strategies that finance their business using repo. Sophisticated quants deriving metrics by combining our data with other data sets, looking to understand return on repo investments, measure liquidity or portfolio risk, and use our data as an input into their existing universe. Money market funds looking to invest in short-term safe bonds like commercial paper (CP). Sell-side firms with research and strategy departments looking to understand rates and where the repo rates are going relative to interest rates.