Skip to content

Subscribe to MarketScape

Weekly videos — in three minutes or less — on global markets and investments, from the investment experts at Northern Trust.
Contact Us
To learn more about our distinctive solutions and client experience, call us today.
MarketScape

Money Market Investors Embrace a Calmer Repo Market

Still fresh on money market investors' minds is the repo market seizure back in September that temporarily drove rates to as high as 10%. However, investors have embraced the Federal Reserve's forceful response. Peter Yi, director of short duration fixed income, explains.

  • Mitigating Disruption
  • Controlling Overnight Rates
  • Fed Proving Up to Task



Still fresh on money market investors' minds is the repo market seizure back in September that temporarily drove rates to as high as 10%. However, investors have embraced the Federal Reserve's forceful response. Let's look at what the Fed has done and what investors should expect.

Mitigating Disruption

Money market investors viewed year-end to be a significant milestone to test the Federal Reserve's preparation for controlling the repo market, a key overnight financing market for government securities that the Fed uses to control money supply. The Fed reassured investors with almost half a trillion in new liquidity to address any dislocations at year-end. The Fed clearly demonstrated that they can inject substantial liquidity into the financial markets using various temporary repo facilities designed for primary dealers. Further, the Fed committed to purchasing $60 billion dollars a month in U.S. Treasury bills, expanding its balance sheet and increasing the amount of excess reserves in the financial system.

Controlling Overnight Rates

The Fed will likely sunset these temporary repo operations as the size of its balance sheet increases with its Treasury bill purchases. While the Fed debates whether it should adopt a permanent liquidity facility, we believe it's unlikely in the near future. The cumulative Treasury bill purchases should eventually create enough ample reserves in the financial system to absorb potential dislocations in overnight rates and the repo market. Last week, the Fed's open market committee kept the short-term interest rate target range unchanged in January, as expected. However, for money market investors, there were two small technical adjustments. The Fed increased by 5 basis points the interest rate it pays on excess reserves and also its reverse repo facility. We think the Fed will continue to tweak its operational model for more precision in its ability to control overnight rates.

Fed Proving Up to Task

Chairman Jerome Powell has said the Fed cannot smooth out every instance where the repo rate is significantly outside of the Fed's target range. But we think investors can feel more confident that the Fed is up to the task when the money markets show signs of disruption.

Peter Yi, CFA

Director, Short Duration Fixed Income and Head of Taxable Credit Research
Peter Yi is director of short duration fixed income and head of taxable credit research for Northern Trust Asset Management.

RELATED ARTICLES

We are seeing the outperformance of growth over value being driven entirely by multiple expansion and, importantly, not a relative change in fundamentals. Head of Quantitative Strategies Michael Hunstad explains what this means for investors.

With the recent flare-up in US-Iran tensions, geopolitical risk is once again firmly on investors' radars.

How has the U.S. stock market performed in election years, and should this time be any different? Chief Investment Strategist Jim McDonald explains.