I was reading this article about repurchase agreements.

I don't understand this graph:

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And this paragraph:

Borrowing rates using German and French government bonds as collateral fell to minus 4.9% and minus 5.3%, respectively, which meant market participants were being paid record amounts to borrow.

Why would borrowing rates be negative?

So if I have German bonds and give them to a bank for 100\$, then I will pay back only 95.1\$?

Why would the bank accept such a deal? Besides the fact that they loose money, don't they need to hold cash?


Why are repo rates in Euro negative? Because the policy rates of the central bank (the ECB) are negative. In other words, the ECB policies cause overnight repo rates to be negative. Yes, if you borrow money from a bank and post German bonds as collateral, you will pay back less than you borrowed. Don't forget these are overnight rates, so the 'discount' will not be as great as your calculation gives.

If you are also wondering why these overnight rates spike at year end and at quarter ends, it's because these are the dates on which banks report their balance sheets. Banks attempt to reduce their balance sheet on those dates, which can have a significant effect on the repo rate for that day.

  • $\begingroup$ Doesn't reducing the balance sheet mean having fewer assets? Why would they prefer having an asset(a bond) instead of cash(liquidity)? I thought that at year end banks should have as much liquidity as possible. $\endgroup$ – o1ctav Dec 6 '17 at 21:30

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