Concerning the classic swap spread arbitrage trade where you (as far as I understand it):
- Buy a treasury and borrow in GC repo, paying repo rate and funding the haircut in short term unsecured funding market.
- Enter into a pay fixed swap with maturity matched to the treasury, borrowing initial margin @ OIS
On net, you pay the swap spread, and earn LIBOR - GC repo rate - haircut/margin financing.
Specifically, are there any papers that have done work on the effect of volatility in the short term rates markets on this trade? Given that LIBOR/GC repo rate are components in the trade’s return, are attempts ever made, in practice, to hedge the volatility in these components?
A)Think an event like the repo spike in sept 2019.
B)Or, hypothetically speaking, if you are doing this trade in the long dated treasury space (30y), could increasing UST vol, for example have an indirect effect on the trade by increasing haircuts?
C)Moreover, is it plausible to suggest that a severe steepening in the cash curve would not be accompanied by a widening in swap spreads. What is the dynamic observed in practice? Post 2019, When the cash curve steepens, do swap spreads tend to widen or tighten?