A change in the repo market could make TIPS more liquid. The Fixed Income Clearing Corporation, which handles the back office operations of liquid securities, recently added TIPS to the pool of securities eligible to fulfill a general collateral obligation. As a result, dealers can now interchangeably deliver Treasuries, TIPS, agencies or mortgage-backed securities as collateral in the repo market.
The change could narrow the spread between the TIPS repo rate and the rate for nominal Treasuries, according to Gerald Lucas, chief Treasury and agency strategist at Banc of America Securities. TIPS have become established as a fixed-income product and have gained enough liquidity to join the pool, according to Ed Leitheat, FICC's product manager of government securities.
Of course, the number of nominals far outpaces the number of TIPS available: The TIPS repo rate is 3-5bps higher than Treasuries just because of that, Lucas explained. But because of the change the spread to Treasuries could narrow by one to two basis points and trading volumes increase, he said.