Answer-first summary for fast verification
Answer: On-the-run special spreads peak immediately after an auction, and tend to decrease over the cycle, reaching their lowest level immediately before the next auction.
## Explanation Let's analyze each option: **Option A: TRUE** - On-the-run (OTR) issues are the most recently issued securities and are in high demand for collateral purposes, so they do trade with larger special spreads (i.e., "more special") than off-the-run issues. **Option B: TRUE** - The special spread is correctly defined as the difference between the general collateral (GC) repo rate and the special collateral repo rate: Special Spread = GC Repo Rate - Special Repo Rate. **Option C: FALSE** - This statement is incorrect. On-the-run special spreads actually reach their **lowest** level immediately after an auction when supply is plentiful, and they **increase** over the cycle, reaching their **highest** level immediately before the next auction as supply becomes scarce. **Option D: TRUE** - Special spreads are indeed volatile due to supply and demand dynamics for specific collateral, and they can be quite large, sometimes reaching hundreds of basis points. Therefore, option C is the false statement and the correct answer.
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In regard to special spreads, each of the following is true EXCEPT which is false?
A
On-the-run (OTR) issues tend to trade "more special" than off-the-run (OFR; i.e., old or double-old) issues, where "more special" refers to special spreads that are larger.
B
The special spread equals the general collateral (GC) repo rate minus the special collateral (aka, specifically requested collateral) repo rate.
C
On-the-run special spreads peak immediately after an auction, and tend to decrease over the cycle, reaching their lowest level immediately before the next auction.
D
Special spreads tend to be volatile on a daily basis (reflecting supply and demand for special collateral) and special spreads can be quite large (e.g., hundreds of basis points).