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That definition doesn't seem right. The repo rate is just the rate paid on repurchase agreements, a type of risk free, short term loan where collateral is excha

That definition doesn't seem right. The repo rate is just the rate paid on repurchase agreements, a type of risk free, short term loan where collateral is exchanged for cash, then exchanged back again. Central banks shouldn't be involved. The Fed is only involved now as an emergency provider of liquidity. https://en.wikipedia.org/wiki/Repurchase_agreement?wprov=sfla1 https://en.wikipedia.org/wiki/Repurchase_agreement?wprov=sfl...

matthewvincent 7y ago
* And some would say to sneak in a little QE without calling it QE
- QuesnayJr 7y ago
  It's not QE, unless everything is QE. When the Fed targets a short-term rate, this is just ordinary monetary policy.
twic 7y ago
Confirmed, yardie's definition is straight up wrong. EDIT: It's worth noting that the collateral is usually government bonds (this is called "general collateral", or GC), with bonds from quasi-government bodies like Fannie Mae or the World Bank being the second most common kind. One way to look at repo is that it's a way for companies with a big stock of bonds (eg banks) to pawn them to borrow money. This is usually the cheapest option for them to borrow money at scale, and so the repo rate is seen as an indication of banks' financing costs. Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash. I have no idea which use case is more common.
- core-e 7y ago
  > Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash. And the reason you'd do this is... to lock in yield in a declining interest rate environment?
  - twic 7y ago
    There are as many reasons to do it as there are reasons to buy bonds! The five-year US treasury currently yields 1.658%, and SOFR, a measure of repo rate, is currently 1.55%, so that looks a bit like free money. As long as interest rates don't go up. You might be selling bond futures, and want to cover your position. You might think some specific bonds are undervalued relative to others, in which case you can buy the undervalued ones on repo, short-sell some overvalued ones, and wait for the market to correct itself. I'm sure there are many far more ingenious things you can do with bonds.
  - avvt4avaw 7y ago
    For example, if the yield on a long-term bond is 3% and repo rates are only 2%, you might buy the bond, financed with a repo transaction, and bet that over the term of the repo, the bond’s price will hold up enough to allow you to profit from the transaction. If it is a one year repo, the bond could decline in price by 1% and you would still make a profit because its yield is higher than the cost to finance the purchase. A more relevant example is if futures are trading rich relative to bonds - say they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds on repo and sell futures against them, expecting to profit when the price gap closes. Of course, 0.03% is not much profit, so you use 50x leverage (which you can easily do on repo, because it is secured borrowing) turning it into a 1.5% profit.
SilasX 7y ago
So, stupid question: what's the purpose of suppressing short-term interest rates like that? Isn't that a meaningful market signal that banks should be running in a way that's less dependent on loans from other banks, just as a higher price for fish correctly signals market participants to look for substitutes? (Side note: as someone who "should" benefit from more expensive liquidity as a holder of a money market fund, I looked up the Vanguard Prime MMF, and it turns out it doesn't hold any repos[1], even though that's a valid asset class for MMMFs[2]...) [1] https://investor.vanguard.com/mutual-funds/profile/portfolio/vmmxx https://investor.vanguard.com/mutual-funds/profile/portfolio... [2] https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/money-market-funds-all-are-not-created-equal https://www.pimco.com/en-us/insights/investment-strategies/f... >New SEC rules require that government money market funds hold 99.5% of assets in government-related securities, including Treasury bills, agency discount notes and repurchase agreements (repos).
- wcoenen 7y ago
  Since the borrowers could sell the collateral instead, technically they aren't depending on these loans and they could stop using the repo market. However, they would then 1) lose the yield on the bonds and 2) instead need to keep large amounts of money on some account and trust that the bank doesn't go bust. Bond holding is used as an alternative to deposits. The government also doesn't want the repo market to shut down, because that means everybody dumps their gov bonds, since they wouldn't need them as collateral anymore. The dollar amount of outstanding repo contracts is measured in trillions so this would imply a catastrophic increase in the cost of borrowing for the government.
yardie 7y ago
I'm probably way incorrect. But the article kept talking about repos and the repo rate without telling the reader what it actually means. I just went with whatever was the highest indexed in my search. I don't work in finance beyond layman so my understanding of finance domain specific lingo is very limited.

matthewvincent 7y ago

* And some would say to sneak in a little QE without calling it QE

QuesnayJr 7y ago
It's not QE, unless everything is QE. When the Fed targets a short-term rate, this is just ordinary monetary policy.

twic 7y ago

Confirmed, yardie's definition is straight up wrong. EDIT: It's worth noting that the collateral is usually government bonds (this is called "general collateral", or GC), with bonds from quasi-government bodies like Fannie Mae or the World Bank being the second most common kind. One way to look at repo is that it's a way for companies with a big stock of bonds (eg banks) to pawn them to borrow money. This is usually the cheapest option for them to borrow money at scale, and so the repo rate is seen as an indication of banks' financing costs. Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash. I have no idea which use case is more common.

core-e 7y ago
> Another way to look at it is that it's a way to buy government bonds on credit - you can buy a bond and then immediately repo it, using the money you've borrowed to pay for the bond. You have to pay the interest on the repo until you sell the bond and pay it back, but you never have to come up with a big pile of cash. And the reason you'd do this is... to lock in yield in a declining interest rate environment?
- twic 7y ago
  There are as many reasons to do it as there are reasons to buy bonds! The five-year US treasury currently yields 1.658%, and SOFR, a measure of repo rate, is currently 1.55%, so that looks a bit like free money. As long as interest rates don't go up. You might be selling bond futures, and want to cover your position. You might think some specific bonds are undervalued relative to others, in which case you can buy the undervalued ones on repo, short-sell some overvalued ones, and wait for the market to correct itself. I'm sure there are many far more ingenious things you can do with bonds.
- avvt4avaw 7y ago
  For example, if the yield on a long-term bond is 3% and repo rates are only 2%, you might buy the bond, financed with a repo transaction, and bet that over the term of the repo, the bond’s price will hold up enough to allow you to profit from the transaction. If it is a one year repo, the bond could decline in price by 1% and you would still make a profit because its yield is higher than the cost to finance the purchase. A more relevant example is if futures are trading rich relative to bonds - say they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds on repo and sell futures against them, expecting to profit when the price gap closes. Of course, 0.03% is not much profit, so you use 50x leverage (which you can easily do on repo, because it is secured borrowing) turning it into a 1.5% profit.

SilasX 7y ago

So, stupid question: what's the purpose of suppressing short-term interest rates like that? Isn't that a meaningful market signal that banks should be running in a way that's less dependent on loans from other banks, just as a higher price for fish correctly signals market participants to look for substitutes? (Side note: as someone who "should" benefit from more expensive liquidity as a holder of a money market fund, I looked up the Vanguard Prime MMF, and it turns out it doesn't hold any repos[1], even though that's a valid asset class for MMMFs[2]...) [1] https://investor.vanguard.com/mutual-funds/profile/portfolio/vmmxx https://investor.vanguard.com/mutual-funds/profile/portfolio... [2] https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/money-market-funds-all-are-not-created-equal https://www.pimco.com/en-us/insights/investment-strategies/f... >New SEC rules require that government money market funds hold 99.5% of assets in government-related securities, including Treasury bills, agency discount notes and repurchase agreements (repos).

wcoenen 7y ago
Since the borrowers could sell the collateral instead, technically they aren't depending on these loans and they could stop using the repo market. However, they would then 1) lose the yield on the bonds and 2) instead need to keep large amounts of money on some account and trust that the bank doesn't go bust. Bond holding is used as an alternative to deposits. The government also doesn't want the repo market to shut down, because that means everybody dumps their gov bonds, since they wouldn't need them as collateral anymore. The dollar amount of outstanding repo contracts is measured in trillions so this would imply a catastrophic increase in the cost of borrowing for the government.

yardie 7y ago

I'm probably way incorrect. But the article kept talking about repos and the repo rate without telling the reader what it actually means. I just went with whatever was the highest indexed in my search. I don't work in finance beyond layman so my understanding of finance domain specific lingo is very limited.