The repo market underpins much of the U.S. financial system, helping to ensure banks have the liquidity to meet daily operating needs and maintain adequate reserves.
In repo transactions, Wall Street firms and banks post U.S. Treasuries and other high-quality securities as collateral to raise cash (usually overnight) to fund their trading and lending activities.
The next day, the borrower repays the loan plus the usual nominal interest rate and gets the bond back.
In other words, they buy back bonds.
The system typically operates as the interest rate charged on repo transactions hovers close to the Federal Reserve’s benchmark overnight rate.
However, when investors become fearful of lending, as seen during the global credit crisis, or when there are not enough reserves or cash in the system to lend, the repo rate can spike to just above the federal funds rate. superior.
Stock and bond trading can get difficult. It could also reduce lending to businesses and consumers, which if the disruption persists could weigh on a U.S. economy that relies heavily on the flow of credit.
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