The Dow Jones Industrial Average hits an all new high at 29,000, and the Federal Reserve Bank hits the buy button on more short-term treasury bills within the repo market. The Federal Reserve has been conducting these repo offerings and treasury bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves. Just last week, the Federal Reserve decided that they would continue on with the repo purchases at roughly $60 billion a month until February. The latest move extends a repo program that has been in place since it stepped into the repo market this fall, but indicates the central bank is wanting to exit the program this winter. Until recently, banks had more than enough capital reserves to fulfill their needs for cash and regulatory requirements. We all know on Wall Street it is much easier to start a program like this than it is to exit.
What Is Repo, Anyway?
Before we start talking about what to buy, we need to understand what the repo market is. According to Investopedia, a repurchase agreement is a short-term agreement to sell securities in order to buy them back at a slightly higher price. The Federal Reserve Bank enters into the repo market to regulate the money supply and bank reserves.
(Source: WSJ)
Institutions, hedge funds, and banks use this market to finance the purchase of other debt securities and other investments. After the 2008 Great Financial Crisis, investors were focused on a particular type of repo, known as repo 105. Speculation on Wall Street rose around these type of repos. Many financial crisis experts believed they could have played a part in Lehman Brothers’ attempt to hide the bank's declining financial health leading up to the financial crisis. Now, institutional and individual investors are wondering if the same thing is happening again.
