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US repo rate spike: an “alarming echo” of the financial crisis
A sudden shortage of liquidity the repo market last week prompted buyers to bid up prices, sending the rate as high as 10% at one point.
Last week's spike in US repo rates was "an alarming echo of the financial crisis", says The Economist. The usually placid repo short for "repurchase agreement" market is the place where banks go for short-term loans when they need extra cash. Interest rates in this "overnight" market are supposed to stay within the range set by US Federal Reserve interest rates, which was 2%-2.25% before the latest cut (see page 5). Yet a sudden shortage of liquidity last week prompted buyers to bid up prices, sending the rate as high as 10% at one point. The jump prompted the Fed to intervene directly in the market for the first time in a decade. It pumped more than $200bn into the system last week to alleviate the squeeze.
The intervention managed to calm the panic, notes The Economist. The incident suggests that US banks and businesses are "short of cash A spiking repo rate was an early warning sign before the financial crisis."
"Don't worry," says Bill Dudley on Bloomberg. The jump was due to a confluence of benign events. A US corporate tax deadline on 15 September meant there was more demand for cash than usual as businesses emptied their bank accounts. A large auction of US Treasury bills at the same time generated a further surge in cash demand. A more systemic factor is that until last month the Fed had been selling down the $4.5trn bond portfolio it built up through quantitative easing after the 2008 financial crisis. The sales have been "soaking up bank cash reserves" so there are fewer greenbacks to go around.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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"Banks don't seem stressed for funding," agrees Jon Sindreu in The Wall Street Journal. As the Fed has unwound part of its asset portfolio and there is less cash swimming around the central bank may now need to return to using "pre-crisis" techniques injecting money whenever there is a squeeze to manage repo rates. In the topsy-turvy world of modern central banking, that is perhaps one small sign of normalisation.
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
