Repo market

[Ahoo]

Good day,

Can anyone explain the repurchase market, and what, if any effect, the Feds' months-long billions in cash infusions into it are having on the stock market run?

With compliments,

Ahoo

[BTDretire]

Here's a Wall Street Journal article that starts by saying,
"The answer is that the Fed probably isn’t the cause of the stunning rally in Tesla or stocks more broadly, at least in the usual way of thinking about causes. On the other hand, if the Fed hadn’t acted, the market would almost certainly be lower, possibly disastrously so.
https://www.wsj.com/articles/the-fed-mostly-didnt-cause-the-latest-stock-market-melt-up-11579005692

[Kem]

Outside of ignorance or fear mongering that is the media’s grubbing for headlines I fail to understand the recent concern in the repo markets.

Broker Dealers / Banks do not tend to keep large stores cash on hand.  Cash is risky as it can be defaulted on (above rather low limits) by the entity holding the cash.  Instead they keep short term t-bills on hand which like cash it is backed by the full faith of the USG.  Unlike cash it (usually) has some hedge against inflation and can only be defaulted in a meltdown of the USG (at which point cash is already decimated).  Also, cash loans tend to take significant resources to complete and the interest is usually rather high.

These financial institutions have pre-existing agreements for Repurchase & Reverse Repurchase agreements.  Here a (usually – T-bill) is delivered as collateral and in return the business receives Cash for the daily needs.   This is usually settled within a day or so.  In return the other business receives some nominal interest.   

During this time the risks are a change in the value of the T-Bill – in which case one business or the other calls for margin (a balance of cash to make whole).  Of course, the SEC has a whole ruleset on these agreements to ensure that the vast majority of foreseeable risks are mitigated.

This whole ‘fed pumping money in’ concern is… overblown.  Most repos act through a third party --- the federal bank of NY.  Here the Fed pumps money out 1 side and pulls collateral in the other side.  Then when the agreement settles they pull money in 1 side and pump collateral out the other.  Essentially this inflow/outflow is the grease in the wheels that our financial institutions require to operate... if not for this they would need to sit on huge reserves of risky cash and the volatility & failure rate of the financial institutions would be far higher.

Just my 2c

[Ahoo]

Thank you.

Ahoo