Over here are investors with cash that’s not doing anything profitable at the moment. Over there are banks with tons of bonds and a need for ready money. The so-called repo market is where the two sides meet. Repurchase agreements make up an essential, if esoteric, piece of financial plumbing. By providing a place where assets can be pawned for short-term loans, a healthy repo market helps a wide range of other transactions go more smoothly. But a repo meltdown was a crucial part of the financial panic in September 2008, and the U.S. Federal Reserve and other regulators have put in place new rules meant to reduce the dangers. Many market participants think the changes may be creating new pitfalls. Meanwhile, the Fed has entered the repo market on a massive scale, using it as a tool to guide interest rates higher.
The new regulations put pressure on banks to hold onto their safest assets, like Treasuries, rather than lend them out. That’s left U.S. money-market mutual funds and other repo investors struggling at times to find enough borrowers for their cash. European markets are feeling a similar squeeze: The European Central Bank is still buying bonds to bolster growth and inflation, leaving fewer bonds available as collateral for repo deals, particularly German bonds, sought after as the continent’s safest. So in December 2016, the ECB announced that it would accept cash as collateral for its securities lending program in hopes of increasing the availability of bonds for repo transactions. In the U.S., the Fed, which purchased $2.5 trillion worth of Treasuries after the financial crisis, has become a major player in the U.S. repo market. That’s one of the main ways it's succeeded in driving up the interest rate it had pegged at close to zero between 2008 and December 2015. Those years of easy money left so much cash sloshing around that the Fed’s traditional interest-rate tools weren’t likely to work by themselves. So now it wades into the repo market daily, offering to borrow cash from money-market funds and other big investors at a higher rate than banks had been paying.