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Rate increases and the impact on Margin Calls

Timing belt · 2022-02-15 14:46:50

This might be a strange one but I was thinking today that as rates rise on government Bonds the value of the Bond decreases and as government bonds are used heavily in the Repo market will the increase in rates lead to an increase in margin calls as the value of the underlying bond drops. Will this result in a increase in…

15-02-2022 02:46PM

#1

Timing belt

Registered Users, Registered Users 2 Posts: 3,619 ✭✭✭

Join Date: September 2020

Posts: 3606

This might be a strange one but I was thinking today that as rates rise on government Bonds the value of the Bond decreases and as government bonds are used heavily in the Repo market will the increase in rates lead to an increase in margin calls as the value of the underlying bond drops.
Will this result in a increase in demand for bonds from financial institutions as they will need to buy more bonds to provide additional collateral.
If this is the case then is there an arbitrage for a short period between the price of bonds decreasing due to rising rates and then price of bonds increasing as financial institutions increase their bond holding to be able to make their margin calls.

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