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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (898)	4/7/1999 2:13:00 PM
From: Henry Volquardsen	Respond to of 2794

The impact will be mild and shouldn't muddy an analysis of inflation expectations. Dealers need to be able to finance inventory. The most cost and capital effective mechanism for this if repo. If they have to hold outright positions it really hurts their profitability. So any security that is very difficult to repo they will try to keep their inventory as near zero as possible. If they don't have the paper in inventory they are likely to widen their prices. Now initially this would effect yield symetrically but over time it would make the paper slightly less attractive to hold. It will become, in Treasury mkt parlance, off the runs. Off the runs generally yield higher than on the run. This spread is variable depending on market conditions but rarely more than 10 to 15 basis points. If the index bonds trade effectively as off the runs it probably winds up overstating the inflation expectation but I doubt more than 25 basis points.