A repo, or in its full form a repurchase agreement, is a form of short-term borrowing, mainly in government debt securities, gilts and bonds. The dealer sells the underlying debt security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price. The repo market is a significant part of the inner workings of the U.S. financial system creating liquidity.
It is technically short term, overnight or up to two weeks ‘quantitative easing’, with the government ploughing money back into the economy overnight by ‘buying back’ debt overnight at a higher price. Big traders such as banks getting a higher price overnight, they get more cash flow in releasing money for companies to gain access to funds to then borrow to pay corporate taxes which then passes back to Government who then can use it to pay off/buy back its own debt.
It is glorified money conjuring and then recycling.
Reuters estimate the Repo market to be worth around $2.2 trillion (£1.7 trillion pounds) annually.
This week alone, there were deals overnight on Tuesday $82bn and Thursday $74bn. This would appear to indicate financial liquidity pressure and strain on the economy and may come to a head as the central bank tries to deal with banks tightening up as the economy slows.
Try to think of this daily liquidity, money injecting by selling debt and buying debt back the next day as another ‘another interest rate’ cut, think of it like ‘hidden’ quantitative easing and think of it as a ‘gold’ interest rate -, in short the more investors get worried about this market, the more people buy into safe haven such as Gold.
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