The Repo Market

What is the Repo Market?  No, it is not the guy coming to repossess your automobile for those overdue payments.

The Repo Market is where over $3 Trillion in debt is financed each day worldwide. Repo is short for repurchase agreements.  Most transactions are effectively collateralized overnight short-term loans.

The U.S. Fed uses the Repo Market to temporarily extend credit in tight markets. 

Back on September 16th the federal Repo offering froze up, creating panic and fear. There was a mismatch in cash flowing out with securities coming in; this created a crunch for those needing cash driving up interest rates to above 10% which were normally at 2%.

To address the problem the U.S. Fed load out $75 Billion a day in cash over 4 days until the markets settled down.

Many, including the Fed, concluded in the immediate aftermath that two transitory events collided: investors used repo to finance the purchase of a large batch of newly auctioned Treasuries at the same time that quarterly corporate tax payments drained liquidity from that market.  This combination of newly auctioned Treasuries and quarterly corporate tax payments is occurring this week again leading to a microscope being applied to the Repo market.

The BIS (Bank for International Settlements) issued a report outlining broader concerns about the U.S. Repo Market - September stress in dollar repo markets: passing or structural?

Four banks (Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo) that dominate the U.S Fed Repo market hold about 25% of the reserves in the U.S. banking system, but 50% of the Treasuries. This creates a concentration that is apt for problems. 

There are many financial pundits and media outlets outlining fears that the Fed Repo crisis may be a bigger issue in December, and the September events were only a preview.

In the recent weekend the U.S. Fed has added billions in liquidity in an attempt to forestall any potential crisis. CNBC and other outlets covered the Feds weekend purchase operations in depth. The New York Fed issued an unusual statement about repurchase operations. 

How will the situation shake out this week in December and in the upcoming year? Only time will tell.  It appears the U.S. Fed is attempting to get ahead of the situation by providing more cash liquidity before critical junctures.