Repo Releveraging

In Q1, Primary Dealers have re-leveraged significantly by about 16% in aggregate judging by outstanding Repos (see chart below). This is about average for the past 5yrs (excepting Q1 2008 when large off-balance sheet exposures from SIVs were brought back on-balance sheet). However, it is worth noting that outstanding repos are now back to the levels of a year ago.

There are two possible conclusions to make from this development:

• either dealers have been loading up on the rates carry trade, or


• balance sheets are no longer as constrained as they have been over the past year, and this balance sheet expansion argues that aggregate credit is now expanding.

I am obviously talking my book now, but if it is the former, then the rates market is vulnerable to a positioning unwind, and if it is the latter, then growth is likely to be significantly stronger than expected and Fed tightening a lot closer. My personal view, however, is that it is the former, and the price action in rates markets would support this view.