Repo Rate

The repo rate is the interest rate at which one party sells securities to another with an agreement to repurchase them at a specified price on a future date. In essence, it’s a short-term collateralized loan. For example, a dealer might sell $10 million in Treasuries for $9.99 million with agreement to repurchase tomorrow for $10 million, implying an overnight repo rate of roughly 3.65% annualized. The repo market provides crucial short-term funding for financial institutions and facilitates bond market liquidity. The Federal Reserve uses repos and reverse repos to implement monetary policy and manage money supply. During the September 2019 repo market crisis, rates spiked to 10% due to cash shortages, prompting Fed intervention. The repo market totals several trillion dollars daily. Tri-party repo (involving a clearing bank) dominates in the U.S. Different collateral types command different rates – Treasury repo (lowest), agency MBS, then corporate bonds (highest). Repo failures can trigger systemic crises.