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Since this is now an extra thing you can do with bonds (if you're a bank), that presumably increases their value, and thereby drives down their yield, right? It
by FooBarBizBazz 4y ago
Since this is now an extra thing you can do with bonds (if you're a bank), that presumably increases their value, and thereby drives down their yield, right? It depends on what the lending rate on the bonds is. I assume this is calibrated so buyers are indifferent between buying bonds and taking some other alternative... Surely the rate is lower bounded by that on short term treasuries, or else you'd just borrow against bonds to buy T-bills and collect interest...
- slt2021 4y agoThe only bonds that are eligible for new Fed's lending facility are the ones that were purchased on or before 3/13. So you won't be able to fully arbitrage by buying bonds and borrowing against them and closing arbitrage. Fed will make sure that the only banks who use new facility - are the ones who desperately need liquidity, like in SVB's situation plus you pay overnight rate+10 basis points, so it is not totally free money either