Abstract
This paper documents the properties of Government of Canada securities in cash, repo and securities lending transactions over their life cycle. By tracking every security from issuance to maturity, we are able to highlight inter-linkages between the markets for cash and for specific securities. Our results indicate that the interaction of search frictions with clientele effects may be key to producing the patterns of trade exhibited by bonds of different maturities.
Highlights
Financial market participants rely on access to low-cost funding and to specific securities for their operations
We show below that the usage of individual bonds varies over the life cycle, which could be explained by the interaction of clientele effects with the search frictions prevalent in the spot, repo and securities lending markets
The life-cycle perspective of collateral use in spot, repo and securities lending markets reveals that the Government of Canada (GoC) markets can be described by the presence of clientele effects and search frictions
Summary
Financial market participants rely on access to low-cost funding and to specific securities for their operations. Borrowing bonds through repurchase agreements (repos) or in the securities lending markets is important for market makers seeking to fulfil client demand for a specific security, or for hedge funds wishing to sell a specific security short. The interdependence between spot, repo and securities lending markets is captured, which shows that trading volumes in these three markets are highly correlated.. We observe that high volumes and liquidity in the spot market are coincident with high borrowing demand for the security, as in Vayanos and Weill (2008). As discussed in detail below, the preferred habitat of bond market clienteles (Culbertson 1957 and Modigliani and Sutch 1966) makes the trading patterns observed for shorter-term bonds markedly different from those of longer-term securities
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