(Reuters) – The $2.2 trillion repurchase agreement market – part of the inner workings of the U.S. financial system – is facing what could be another strain as the year comes to a close. That could have wider implications than just Wall Street.
FILE PHOTO: The Wall St. sign is seen outside the New York Stock Exchange (NYSE) in New York, U.S., December 17, 2019. REUTERS/Brendan McDermid
WHAT IS THE WORRY OVER REPO?
The repo market came under stress in September as demand for funds to settle Treasury purchases and pay corporate taxes overwhelmed loans available.
Interest rates in U.S. money markets shot up to as high as 10% for some overnight loans, more than four times the Fed’s rate.
Since September, the New York Federal Reserve has offered daily operations where it injects liquidity into the overnight market, in addition to frequent offerings of longer-term loans. It is the Fed’s first major market intervention since the financial crisis more than a decade ago.
This helped the market this month get through another period of high corporate tax payments and Treasury debt settlements with relative ease.
Some analysts still fear, however, that there may be strains heading into year-end, when banks reduce risk taking to meet financial targets.
The Fed’s repo operations are made only with major dealers, with the banks in turn passing liquidity on to their clients.
Heading into year-end the banks may be more reluctant to make these loans, which could leave borrowers…