Hedge funds barely cut repo borrowing as bond costs rise
Hedge funds barely reduce German bond borrowing when repo costs rise, research from the European Central Bank (ECB) finds. Estimates for March 2021–June 2024 show a 10 percent cost increase cuts borrowing by only 1 percent.
Cash demand dictates repo borrowing
Andrea Poinelli, Loriana Pelizzon, Davide Tomio, Benoit Nguyen and Tobias Linzert estimate hedge funds' repo demand elasticity at 0.11, against 1.2 for the market overall.
Suppliers account for 87 percent of aggregate elasticity and borrowers for 13 percent.
Their model explains the contrast with hedge funds' price-sensitive cash trading: funds meet investors' demand for physical bonds by short-selling them, buying futures and borrowing securities through repo.
Borrowing therefore reflects cash-market imbalances and inherits cash investors' limited price sensitivity.
This generates specialness, the gap between the policy rate and a bond's repo rate.
Its subsequent decline reflected reduced borrowing, not changing hedge fund elasticity.
Public lending offsets borrowing pressure
The authors reconstruct ultimate borrower-lender pairs from the Securities Financing Transactions Data Store and add confidential ECB lending data.
Public institutions provide about 60 percent of net securities lending; offshore hedge funds absorb 50–80 percent of borrowing, including dealer-intermediated positions.
At the Q3 2022 peak, the decomposition attributes reductions in specialness of 5 basis points to Germany's debt manager and 10 basis points to the central bank.
The authors present the combined 15 basis points as a decomposition, not a formal counterfactual.
A signal with boundaries
The authors identify repo specialness as an observable signal of cash-bond demand pressure, beyond banks' reserve needs.
Reporting gaps limit visibility into offshore dealer chains, and the estimates do not directly establish US Treasury elasticities.
The findings are the authors' views, not ECB policy.