Repo Market Chaos Could Lead to a Crisis

Chaos in short-term funding markets this week forced the Federal Reserve to step in with a series of overnight rescue operations to help keep credit flowing through the financial system.

A week after seeing yields across most maturities back up sharply something seemed to go haywire in the Federal Reserve’s overnight or repo rate which spiked to almost 10% earlier in the week forcing the Fed to inject liquidity into the system.

Earlier this month it seemed certain interest rates in the U.S. would follow much of the rest of the world toward zero with the yield on the 10-year slipping below 1.45%.  But then there was a quick reversal and yield popped back above 2% briefly. This seemed to have caught a lot of institutions wrong-footed and scrambling for cash.

The repo market channels more than $1 trillion in funds through Wall Street every day, usually without fanfare. That money is… Continue reading at StockNews.com

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