[core-e]

> Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash.

And the reason you'd do this is... to lock in yield in a declining interest rate environment?

[avvt4avaw]

For example, if the yield on a long-term bond is 3% and repo rates are only 2%, you might buy the bond, financed with a repo transaction, and bet that over the term of the repo, the bond’s price will hold up enough to allow you to profit from the transaction. If it is a one year repo, the bond could decline in price by 1% and you would still make a profit because its yield is higher than the cost to finance the purchase.

A more relevant example is if futures are trading rich relative to bonds - say they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds on repo and sell futures against them, expecting to profit when the price gap closes. Of course, 0.03% is not much profit, so you use 50x leverage (which you can easily do on repo, because it is secured borrowing) turning it into a 1.5% profit.

[twic]

There are as many reasons to do it as there are reasons to buy bonds!

The five-year US treasury currently yields 1.658%, and SOFR, a measure of repo rate, is currently 1.55%, so that looks a bit like free money. As long as interest rates don't go up.

You might be selling bond futures, and want to cover your position.

You might think some specific bonds are undervalued relative to others, in which case you can buy the undervalued ones on repo, short-sell some overvalued ones, and wait for the market to correct itself.

I'm sure there are many far more ingenious things you can do with bonds.