The volume of term repos in 2000 relative to 1999 is showing a sharp increase due to several factors, including the publication of an issuance calendar and ten-year agency futures trading. Fannie Mae benchmark securities comprise the majority of term agency repo transactions. Also, term repo is often traded to the next benchmark issuance date, and, with the advent of the futures contract, term repo for ten-year benchmark notes is frequently traded up to futures delivery dates. Latif said benchmark notes can be used for hedging intermediate term interest rate risk by investors, market makers, and issuers. The cost of hedging with Treasuries can be high if the issues are on special.
Benchmark notes provide some amount of spread protection.
Hedging with benchmark notes instead of swaps. Benchmark securities are used for a variety of leveraged trading activities as the repo market has developed. Latif said investors are sometimes able to lock in attractive special repo rates by lending out their holdings to the street dealer firms, who are short the securities for hedging purposes. Latif concluded by saying that Fannie Mae sometimes accepts benchmark notes and bonds as collateral for reverse repo transactions. This reverse repo initiative has provided a backstop for financing levels for benchmark investors, while increasing the depth of overnight and term repo markets for bullet benchmark securities.