A pension contract (repo) is a short-term guaranteed credit: one party sells securities to another and agrees to buy them back at a higher price at a later price. The securities serve as collateral. The difference between the initial price of the securities and their redemption price is that of the interest paid on the loan called the pension rate. Deposits with longer tenors are generally considered riskier. Over a longer period of time, there are more factors that may affect the solvency of the new purchaser, and changes in interest rates affect the value of the repurchased asset. The short answer is yes – but there are significant differences of opinion on the extent of this factor. Banks and their lobbyists tend to characterize regulation as a bigger cause of problems than policy makers who put in place the new rules after the 2007-9 global financial crisis. The objective of the rules was to ensure that banks had sufficient capital and liquidity, which can be sold quickly in the event of difficulties. These rules may have allowed banks to keep reserves rather than lend them to the repo market in exchange for treasury bills. “As the budget deficit has increased by about 50% over the past two years, the supply of new government bonds, which must be absorbed by debt markets, has increased considerably. Since these increased deficits are not the result of countercyclical policy, it can be expected that the supply of government bonds will remain high without any significant change in fiscal policy.
In addition, the marginal buyer of the increased supply of Treasuries has changed. Until recent years, the Fed was buying government bonds as part of its quantitative easing policy. And before the 2017 tax changes, U.S. multinationals with large offshore cash stocks were also major buyers of Treasuries. Today, however, the marginal buyer is a primary merchant. This deferral means that these purchases will likely have to be financed, at least until investors acquire the Treasuries, and perhaps even longer. It is not surprising that the volume of cash-backed repurchase operations has increased significantly over the past year and a half.