Relative Repo Specialness in U.S. Treasuries

This paper investigates the determinants of relative repo specialness between the most recently issued U.S. Treasury security and its immediate predecessor. I find that the relative specialness of the on-the-run increases as the next auction approaches, indicating that pre-auction positioning pressures and declining collateral supply outweigh the on-the-run's approaching loss of superior liquidity. Both relative issue size and repo volatility affect relative specialness in ways that suggest a squeeze option is priced into term special rates. Credit spreads and their volatility emerge as important influences on relative specialness, evidencing the integration between credit markets and the Treasury market. I also document a clear reduction in relative specialness in the note sector following the expansion of the Fed's securities lending program in 1999