Overnight reference rates provide up-to-date information about financing costs in various money markets. Dividing them broadly between two categories, there are those that reference unsecured transactions (not backed by collateral) and those that reference secured transactions (which are backed by collateral). 

Typically, a reference rate that measures the cost of unsecured transactions will be higher than a reference rate that measures the cost of secured transactions, assuming both rates reference the same currency and region. This is intuitive as collateral provides the lender with security in case the borrower fails to repay the lender according to the agreed upon terms of the transaction.   

However, central bank policy can result in unsecured rate values that are below that of secured rates. For instance, if a central bank decides to provide liquidity during times of market stress it will buy bonds in the open market – this results in more cash and fewer bonds in the market as the central bank becomes a major buyer. In turn, this increased demand for bonds reduces secured borrowing rates as cash is abundantly provided by the central bank.  

Comparing CME Group RepoFunds Rates (which measure one-day repurchase agreement rates for the euro, sterling and Japanese money markets) to their unsecured reference rate counterparts provides some insights on the relationship between central bank policy and the spread between unsecured and secured rates.

The euro area

The main unsecured rate in the euro area is the euro short-term rate (€STR), which measures the wholesale unsecured overnight borrowing costs of banks in the euro area. As Figure 1 below demonstrates, the positive or negative nature of the unsecured – secured spread between €STR and RFR Euro coincides with periods of ECB balance sheet growth or decline.  

This spread was negative in 20141 and began to increase toward positive territory in 2016 as the ECB expanded its assets from €2.2T in early 2014 to €4.5T in early 2018. This spread then returned to negative territory as ECB assets remained relatively flat with only an increase from €4.5T to €4.7T from 2018 to early 2020. This “plateauing” of the balance sheet meant that the cash injections from the ECB into the market were slowing, which resulted in less demand for bonds and subsequently higher secured borrowing costs and thus resulting in the secured – unsecured spread shifting into negative territory. 

This spread then turned positive as the ECB aggressively expanded its assets in response to the COVID-19 pandemic in early 2020, moving from €4.7T in assets to a peak of €8.8T in mid-2022, only to then turn negative as the ECB stopped expanding its balance sheet beginning in mid-2022.

Figure 1 – EU overnight rate spread compared to ECB total assets

The ECB’s deposit facility tells a similar story as the unsecured – secured spread tends to change depending on the direction of the rate offered at the deposit facility as demonstrated in Figure 2. The spread turned positive as the deposit facility increased from near zero in 2014 to €0.7T in early 2018. When the deposit facility offered positive rates for the first time since 2012 in 2022, the spread increased dramatically, only to fall as the ECB balance sheet size declined as demonstrated in Figure 1.

Figure 2 – ECB balance sheet deposit facility

While RFR Euro includes sovereign bonds from countries across the euro area, isolating this analysis to only Germany and Italy RFRs shows that this trend has implications for even the highest rated EU debt. German debt and Italian debt represent the “book ends” of the EU repo market, with Germany being among the highest rated debt and Italy being among the lowest. As such, German debt would be expected to trade at the widest spread from the unsecured rate and Italy the narrowest. 

As Figure 3 demonstrates, if only RFR Germany were considered, €STR-RFR spreads would be mostly positive, though still declining to around zero and even into negative territory during the periods discussed above. On the other hand, the spread between €STR and RFR Italy is frequently negative, and is only briefly positive during periods of central bank asset growth. 

Figure 3 – ECB balance sheet and RFR Germany and RFR Italy spreads

The United Kingdom

The main unsecured rate in the United Kingdom is the Sterling Overnight Index Average (SONIA), which measures the overnight rate that banks pay to borrow from other financial institutions. Analyzing the unsecured-secured spread in this market reveals similar, although less dramatic, movements between Bank of England assets and the spread nature than those seen in the euro area. 

From 2014 to 2016, the BoE held assets steady at about £370B, which coincided with a negative spread as secured borrowing costs were not being supported by central bank bond purchases. When the BoE began buying bonds again and increased its holdings to about £435B in late 2016, the spread turned positive, only to fall back to negative as the buying flattened into early 2020.

The BoE’s large increase in gilt holdings in response to the COVID-19 pandemic resulted in a significant increase in the spread. However, like the euro area, once this balance sheet expansion ended, narrower and negative spreads have become significantly more common. 

Figure 4 – UK overnight rate spread compared to BOE gilt holdings


The main unsecured rate in Japan is the Tokyo Overnight Average rate (TONA) which measures overnight unsecured borrowing costs between financial institutions in Japan. Analyzing this rate compared to the RFR JBOND tells a different story than Europe and the UK. In this case, the Bank of Japan has not significantly decreased its balance sheet in the early 2020s as it was already relatively high prior to the COVID-19 pandemic, unlike its counterparts in the EU and UK.  This relatively long period of accommodative policy has coincided with a consistent positive spread from 2018 to present. 

Figure 5 – Japan overnight rate spread compared to BOJ assets

However, assets held by the BoJ as a percentage of national GDP are quite high at 135% as of Q3 2023, as demonstrated below in Figure 6. 

The high assets-to-GDP ratio shows just how intense the BoJ’s bond buying has been and suggests that there may be limitations on BoJ balance sheet growth in the future. Market participants with exposure to Japanese rates and/or repo should monitor changes to BoJ policy that manifest themselves in the spread between TONA and RFR JBOND. 

Figure 6 – BoJ assets as % of GDP

  1.  €STR data prior to October 2, 2019 is based on the daily EONIA rate less 8.5 basis points as determined by the ECB prior to the launch of €STR 

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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