The Treasury'​s Office of Financial Research published a working paper titled, "Repo Rate Spillovers: Evidence from a Natural Experiment." It says, "This paper explores how rises in funding costs in one asset class can spill over into other classes via the repurchase agreement market. More specifi​cally, I inspect how a one-​time policy induced exogenous increase in Treasury collateralized repo rates aff​ected non-​Treasury collateralized repo borrowing by dealers. Dealers were heterogeneously ex-​posed to the rate rise due to their pre-​period portfolio composition. More exposed dealers saw a 5% relative increase in the cost of borrowing in the repo market against non-​Treasury collateral. This increase in funding costs came completely from an increase in repo rates, but dealers partially managed increased funding costs by lowering their total amount of repo borrowing. Rate rises are best explained by the asset class being used to collateralize the repo. However, the quantity declines are best explained by the dealer'​s total increased funding costs rather than increased funding costs for individual classes, suggesting that dealers transmitted the rate change to less directly aff​ected asset classes following the policy shock. Aff​ected dealers decreased their non-​Treasury secondary market activity immediately following the policy shock, and this resulted in declines in profi​tability and increased bid-​ask spreads. These results show that shocks originating in one specifi​c repo collateral class can propagate to others through the dealer'​s balance sheet." The paper explains, "The U.​S. repurchase agreement market (​repo market) is one of the most important short-​term funding markets in the world. As of August 2024, it has over $​6 trillion of outstanding contracts, most of which is overnight and much involving one of the major U.​S. primary dealers. Primary dealers use this market to fund their activity in a variety of different asset classes, including Treasuries, Agency MBS, and corporate bonds.... While prior research has shown that repo funding cost fluctuations affect its collateral asset class ..., it is less understood how rate fluctuations in one collateral class can affect rates and quantities in other classes." It adds, "This paper examines the interplay between the repo rates offered on different collateral classes and how rate changes in one collateral class can propagate to other classes. This study is motivated by previous periods of instability in the repo markets. Often, the repo rates on different asset classes move together, which is consistent with the rate propagation mechanism above. However, the markets for the collateral assets are typically also reacting to fundamental price shocks, so it is difficult to differentiate between rate volatility originating from the repo market and volatility that is driven by an economic shock affecting the secondary market for these assets simultaneously. In this research, I use an exogenous change to a Treasury repo policy rate in order to see how this policy rate propagated into other asset classes. Since this change originated within the repo market itself, this allows me to disentangle secondary market price movements from the rate dynamics in the repo market."

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