client demand;   7Perhapstheissueis in great demand to satisfy borrowing needs. ■ hedging including corporate bonds underwriters who short the relevant maturity benchmark government bond that the corporate bond is priced against; ■ derivative trading such as basis trading creating a demand for a specific bond; ■ buy-back or cancellation of debt at short notice.   Financial crises will also impact a particular securitys "specialness." Specialness is defined the spread between the general collateral rate and the repo rate of a particular security. Michael Fleming found that the on- the-run 2-year note, 5-year note, and 30-year bond traded at an increased rate of specialness during the Asian financial crisis of 1998. In other words, the spread between the general collateral rate and the repo rates on these securities increased. Moreover, these spreads returned to more normal levels after the crisis ended.8 While these factors determine the repo rate on a particular transac- tion, the federal funds rate (discussed in Chapter 6) determines the gen- eral level of repo rates. The repo rate generally will trade lower than the federal funds rate, because a repo involves collateralized borrowing while a federal funds transaction is unsecured borrowing. Exhibit 8.4 presents a time series plot of the federal funds rate and the overnight repo rate each day from October 2, 2000 to April 6, 2001 (129 observa- tions). The overnight repo rate is on average 8.17 basis points below the federal funds rate.9       SPECIAL COLLATERAL AND ARBITRAGE   As noted earlier in the chapter, there are a number of investment strate- gies in which an investor borrows funds to purchase securities. The investors expectation is that the return earned by investing in the securi- ties purchased with the borrowed funds will exceed the borrowing cost. The use of borrowed funds to obtain greater exposure to an asset than is possible by using only cash is called leveraging. In certain circumstances, a borrower of funds via a repo transaction can generate an arbitrage opportunity. This occurs when it is possible to borrow funds at a lower rate than the rate that can be earned by reinvesting those funds.     8Michael J. Fleming, "The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives," FRBNY Economic Policy Review (April 2000), pp. 129- 145.