Repo
A repurchase agreement — a short-term (often overnight) collateralized loan where securities are sold and agreed to be repurchased, serving as the plumbing of money markets.
A repurchase agreement (repo) is effectively a collateralized short-term loan. The cash borrower sells securities (typically Treasuries) to the cash lender and simultaneously agrees to repurchase them at a slightly higher price (the repo rate) on a specified future date.
Repo is the backbone of short-term funding for banks, broker-dealers, and hedge funds. Trillions of dollars in repo transactions are conducted daily. Primary dealers finance their Treasury inventory via repo. Hedge funds use repo for leveraged fixed-income positions.
Disruptions in repo markets signal severe liquidity stress — the September 2019 repo rate spike to 10%+ forced the Fed to intervene urgently. Repo market health is a key real-time indicator of system liquidity.
Example
A dealer owns $100M in 10-year Treasuries and needs overnight funding. It sells the bonds to a money market fund for $100M with an agreement to buy them back tomorrow for $100.014M — a 5.10% annualized overnight repo rate.
Related Terms
Carry (Rates)
In fixed income, the net income earned by holding a bond position after financing costs — positive carry means the bond yields more than its funding rate.
AdvancedDiscount Rate
The interest rate the Federal Reserve charges commercial banks for direct short-term borrowing from the Fed's discount window.
IntermediateFederal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediatePrimary Dealer
An elite bank or broker-dealer authorized to trade directly with the Fed and required to participate in every Treasury auction.
AdvancedQuantitative Tightening
The Fed's policy of shrinking its balance sheet by allowing bonds to mature without reinvesting the proceeds — the reverse of QE.
AdvancedReverse Repo
The Fed's tool for absorbing excess reserves from money markets — the counterparty sells Treasuries to the Fed overnight, draining liquidity from the system.
AdvancedSOFR
Secured Overnight Financing Rate — the benchmark short-term interest rate based on actual overnight Treasury repo transactions, replacing LIBOR.
AdvancedTreasury Security
Debt issued by the U.S. federal government through the Treasury Department — the benchmark risk-free asset in global finance.
Beginner