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What’s on Our Mind: The Repo Market
You might be asking, what the heck is the repo market? An easy way to describe it is akin to the way you think about the plumbing in your house. Like your plumbing, no news is good news. The repo market is the overnight loans market between banks and corporations. Yes, banks make loans overnight to companies for various purposes such as payroll, debt payoff, etc. It truly is the plumbing of our financial system.
In the 3rd quarter, there was a spike in interest rates from 2% to nearly 5%. The technicalities aren’t necessarily important, but there was a credit crunch in this market. The liquidity, or ability for companies to borrow suddenly dried up and rates spiked. Much like if your plumbing started making noise, this “repo-spike” has our ears perking up. When the plumbing is acting funny, we start paying attention to what could possibly be the larger impacts of such an event.
This week is another potential event for causing a spike in overnight rates. Corporate taxes are due and often times these large payments can be paid using loans from the repo market. While corporate tax payments historically have not caused any spike or had any noticeable impact, in September it did. So now we’re watching closely.
This isn’t intended to scare you about a cataclysmic economic event, but these are the types of things that we pay attention to daily. Rest assured we will be paying attention to that market, the plumbing in the financial system as we always do.
The views are those of Robert Jeter and Eric Johnston and should not be construed as specific investment advice. Investors cannot directly invest in indices. Past performance is not a guarantee of future results.
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