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Home https://server7.kproxy.com/servlet/redirect.srv/sruj/smyrwpoii/p2/ Business https://server7.kproxy.com/servlet/redirect.srv/sruj/smyrwpoii/p2/ Wall Street buzzes about Repo prices. That's why.

Wall Street buzzes about Repo prices. That's why.



Investors take for granted that the Federal Reserve controls interest rates. They rarely have to think how.

But a surprisingly lively few days in short-term money markets means that "how" has become almost as important as "why."

Stress began on Monday in the market for repurchase agreements or reposts. The market for repo channels over $ 1 trillion on Wall Street every day, usually without fanfare. This money is used to pay for the day-to-day operations of major banks and hedge funds.

Then the Fed's top interest rate, known as the federal unds r eats, hit 2.3 percent on Tuesday. This is above the target of the central bank and the rise reflects unexpected tensions.

But this week went wrong: the cost of borrowing from the repo market shot sharply higher than Monday, which caught people off guard.

Interest rates on overnight loans, which average approximately 2.2% since early August, jumped to 2.88% on Monday. Then on Tuesday they rose to 6 percent.

Repo rates are designed to reflect the percentage of federal funds, and this decreases as the central bank lowers its interest rate target to strengthen the economy.

When big money is available for big banks to borrow every night, interest rates remain low.

But in recent days a number of factors have squeezed funds out of the market. Monday was the deadline for paying big business taxes and vacationing in Japan, which meant that a large source of funds was off. And after a recent government bond auction, people had to divert money to pay it.

These were the likely trigger events for this week's jump. But the amount of money raised in this market has been diminishing for some time. And it's because of the Fed.

As of 2018, the Fed shrinks its bond holdings and turns its crisis era policy to push money into the financial system.

The change effectively reduced the supply of money available in the short-term credit markets, The speed of short-term rates suggests that the Fed may have eliminated a little too much, making reserves too scarce.

"The problem is we don't know what this minimum level is and we just dropped into it," says Gennady Goldberg, senior US interest strategist at TD Securities USA.

The buy-back market is just one of the short-term money markets where short-term cash and bank reserves are channeled to borrowers and the increase in interest rates on some may affect others.

In the commercial paper market – unsecured loans to banks and other large corporations – overnight interest rates have also risen.

The good news is that a short increase in short-term interest rates probably won't mean much to the broad economy.

The speed of repo rates does not mean that investors now consider bond bonds to be risky. If this were the case, the interest rates on the bond market would be higher. In fact, they are quite low. The yield on the 10-year note was approximately 1.8 percent on Wednesday.

"Although these issues are important for the functioning of the market and market players, they do not affect the economy or monetary policy position," Fed President Jerome H. Powell said at a news conference Wednesday.

Essentially, the history of the repo market this week is essentially a hoot for the technocrats at the central bank, leaving markets without enough money to go around.

This is not great to see, but there is no reason to believe that this is the leading indicator of another financial crisis.

Jeanne Smialek contributed to the reporting.


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