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equanimity
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Joined: April 30th, 2013, 2:54 am

How to Finance the Purchase of a Forward Bond Settlement?

May 17th, 2017, 4:45 pm

Let's assume that I have nothing else in the portfolio and I buy a bond for settlement 30 days from today.  What is the implication in terms of repo financing?  
Would I trade a 30-day term repo?  Or, would it be an overnight repo on, say, the 29th day?
Thanks!
 
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ekeenan81
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Joined: May 4th, 2009, 11:59 am

Re: How to Finance the Purchase of a Forward Bond Settlement?

May 17th, 2017, 6:26 pm

It would depend on how you traded the bond.
Is it a bond forward, or just a bond with a forward settlement.
Generally you would structure the repo on the settlement date of the bond to finance it which could then reduce/minimize your cash out-lay.
I think your question gets more into the best cash management strategy?
 
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equanimity
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Re: How to Finance the Purchase of a Forward Bond Settlement?

May 17th, 2017, 6:38 pm

@ekeenan81 - Let's just assume that it's a forward settlement date.  I have nothing in the portfolio and I buy a U.S. Treasury note today for settlement 30 days from now.  I will owe money to someone 30 days from now, right?  So, if that's the case, do I have a choice of the following?

a) 30-day term repo starting today
b) overnight repo starting 29 days from now

Thanks! 
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

Re: How to Finance the Purchase of a Forward Bond Settlement?

May 18th, 2017, 8:58 am

@ekeenan81 - Let's just assume that it's a forward settlement date.  I have nothing in the portfolio and I buy a U.S. Treasury note today for settlement 30 days from now.  I will owe money to someone 30 days from now, right?  So, if that's the case, do I have a choice of the following?

a) 30-day term repo starting today
b) overnight repo starting 29 days from now

Thanks! 
Why would you want to do a repo starting today in the scenario you have described?  In fact, how would you do a repo starting today, given that you don't have the collateral to lend?

You can do a fwd repo or you can wait until time T.
 
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equanimity
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Re: How to Finance the Purchase of a Forward Bond Settlement?

May 18th, 2017, 1:00 pm

@Martinghoul - when you say "You can do a fwd repo or you can wait until time T.", do you mean the following?

a) do a forward repo:  today, we trade a repo from day 29 to day 30 (assuming day 30 is the settlement date of the bonds)
b) wait until time T:  at day 29, trade an overnight repo from day 29 to day 30

Thanks!
 
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Martinghoul
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Re: How to Finance the Purchase of a Forward Bond Settlement?

May 18th, 2017, 2:23 pm

@Martinghoul - when you say "You can do a fwd repo or you can wait until time T.", do you mean the following?

a) do a forward repo:  today, we trade a repo from day 29 to day 30 (assuming day 30 is the settlement date of the bonds)
b) wait until time T:  at day 29, trade an overnight repo from day 29 to day 30

Thanks!
Indeedy, this is what I mean...  Obviously, in either case you can do term repo, rather than o/n.
 
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ekeenan81
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Re: How to Finance the Purchase of a Forward Bond Settlement?

May 24th, 2017, 7:58 pm

 I don't think you would want to do option a.
You are basically locking yourself into an repo rate today for a future date accrual. If rates were to move meaningful enough, you would need to break the repo that could have then additional costs there as well.
In practice you shouldn't have a 30 day settlement cycle.. which is more in the bank loan space.
Generally you would have an ON to 3 day repo to cover the settlement aspect/cash management side of things with regards to funding your trading.
 
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equanimity
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Re: How to Finance the Purchase of a Forward Bond Settlement?

June 6th, 2017, 6:06 pm

Thanks all!