Safe Asset Carry Trade

We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). A standard, no-arbitrage model with a market and a carry factor prices these near-money assets. While the market factor determines the short-term interest rate level, the carry factor accounts for the cross-sectional dispersion providing for a remunerative carry. Consistent with the safe asset literature, the carry factor reflects heterogeneity in convenience yield and increases in safety and liquidity premia, and opportunity cost. Our carry factor helps explain the cross-section of long-term bond returns after accounting for standard bond pricing factors