Repo Rates Soared—Here's Why It Matters

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 25 September 2019

⏱️ 32 minutes

🔗️ Recording | iTunes | RSS

🧾️ Download transcript

Summary

How a liquidity crunch in the short-term lending markets sent interest rates soaring. Why this is a huge blunder on the part of the Federal Reserve, and what it means for us as individual investors.

Topics covered in this episode include:

What are repurchase agreements and how are they used to finance U.S Treasuries.
How outflows from money market funds and hoarding by banks led to a liquidity crunch that caused repo rates to spike to 10%.
Why banks are hoarding reserves held at the central bank even though there are over $1.4 trillion of them, up from $20 billion in 2007.
How quantitive easing increases reserves and quantitative tightening reduces reserves.
How the Federal Reserve was able to stop the disruption in the repo market, even though the central bank was caught off guard and could have prevented it.
How individual investors can protect themselves from unintended consequences arising from the unconventional policies and experiments being conducted by the Federal Reserve and other central banks.

Thanks to The Great Courses Plus and LinkedIn for sponsoring the episode.

For show notes and more information on this episode click here.

[0:20] The Fed loses control over policy rates, and repo interest rates soar.
[2:19] What is a repurchase agreement (repo)?
[5:02] Why the big players in repos pulled back on Sept. 16th.
[8:38] Banks need more liquidity because of regulations.
[12:53] Why reserves have fallen so low.
[17:43] How does the reserve balance get reduced?
[19:23] The Fed may have shrunk it’s balance too far.
[21:36] What can be done about the reserve shortage?
[24:17] What can we learn from the repo rate raise?

See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Transcript

Click on a timestamp to play from that location

0:00.0	Welcome to Money for the rest of us. This is a personal finance show on money. How it works, how to invest it and how to live without worrying about it.
0:09.4	From your host David Stein today is episode 270. It's titled, Repo Rate Sword and why it matters.
0:20.6	Last week I got a call from a retired family member who heard from a friend that there was some disruption related to interest rates and banks that was very similar to what happened during the great financial crisis of 2008. He wanted to know should he move
0:36.0	his assets to cash. This is remarkable how quickly an esoteric financial news event that we're going to talk about in today's
0:45.7	episode spread among some people in the US and they were worried about it, even if they didn't really understand it.
0:57.0	And it's not easy to understand. Believe me, it's taking me a number of hours of going through trying to understand what happened, why it happened, and why it matters.
1:10.0	Here's a sense of what happened per the financial times.
1:15.0	The cost of borrowing cash overnight in exchange for U.S. treasuries, known as a repurchase agreement or repo soared early last week,
1:26.0	pushing the main interest rate targeted by the Federal Reserve out of its target range.
1:32.0	That prompted the New York Fed to intervene in the market for the first time in a decade on Tuesday.
1:39.0	It subsequently continued daily $75 dollar cash injections throughout the week.
1:47.0	Now that's the crux of it.
1:49.0	There's these financial transactions and securities called Repurchase Ag agreements, which we'll look at.
1:55.8	But more importantly, the interest rate on them got out of control, up to 10 percent at one point, which means the Fed lost control of its policy rate for a short
2:09.5	amount of time, which gives a hint for what we can learn from this.
2:13.0	The Fed doesn't have complete control over what's going on.
2:18.0	Now what is a repurchase agreement?
2:21.0	It is when one entity sells government securities to another entity,
2:27.8	usually overnight, but sometimes longer,
2:30.6	and promises to buy the securities back, usually the next day, and at a higher price.
2:38.0	The seller gets cash and the buyer effectively has collateral that secures the loan.
2:47.0	The buyer the securities earns interest, which is effectively the difference between what the bond was sold for and bought back.
	...

Please login to see the full transcript.

Previous episode | Next episode

Disclaimer: The podcast and artwork embedded on this page are from J. David Stein, and are the property of its owner and not affiliated with or endorsed by Tapesearch.

Generated transcripts are the property of J. David Stein and are distributed freely under the Fair Use doctrine. Transcripts generated by Tapesearch are not guaranteed to be accurate.