The last time Main Street investors heard about the repo market was in 2007. It wasn’t good.
The repo market has been back in the headlines over the past week. But 2007, this is not.
“Repo” is Wall Street-speak for repurchase agreements. These are short-term loans, usually lasting only a day or so. Banks and big traders like hedge funds use them to pay for their daily trading operations. Big money market mutual funds and other big sources of readily available cash are the lenders. It is a $1 trillion market that circulates money in the piping of the developed global financial system.
When it locked up in 2007, it was among the early warning signs of trouble. Back then lenders had the cash, but they didn’t want to loan it out and take mortgage bonds as collateral. Eleven months later, investment bank Lehman Brothers would collapse. Among its financial sins was relying on heavily leveraged repos to fund its business.
This isn’t a Lehman moment.
Borrowing rates in the repo market shot up last week because of temporary supply constraints, not concerns about the quality of credit from those demanding the loans. There were myriad of reasons explaining the spike, and subsequent Federal Reserve intervention in the market to calm things down: Third-quarter corporate tax payments were due, there was a bank holiday in Japan, and there were other one-time circumstances that sucked cash out of the market for a time.
The central bank entered the repo market three times last week. It marked the first such action by the Fed since the Great Recession. That notable occurrence is enough to understandably raise concerns of investors. While the Fed took direct action by offering its own overnight loans, it was not worried enough to get more aggressive than expected with its short-term target interest rate.
The spike in repo market interest rates is not something to simply ignore. But in the week ahead, investors hope this monster of a market quiets back down.
Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView.