What is the repo rate?

The repo rate is the interest rate on a repurchase agreement, a short-term transaction where one party sells a security (typically a US Treasury bond) to another with an agreement to repurchase it at a slightly higher price on a specified date, often the next business day. The difference between the sale and repurchase price is the repo rate, effectively the cost of borrowing cash using high-quality collateral.

The repo market is the largest short-term funding market in the world, with over $4 trillion in daily transactions in the US alone. Banks, broker-dealers, money market funds, hedge funds, and the Federal Reserve all participate actively. For primary dealers, the repo market is their primary tool for financing Treasury inventory. For money market funds, reverse repos (the lending side) are a core cash management tool. For the Fed, repo operations are the mechanism through which it implements the federal funds rate target.

Repo rates are closely connected to the federal funds rate and SOFR. In fact, SOFR is calculated as a volume-weighted median of overnight Treasury repo transactions reported to the Federal Reserve Bank of New York. When the repo market functions smoothly, SOFR and repo rates trade in a tight range around the interest on reserve balances (IORB) rate set by the Fed. When dislocations occur, as happened in September 2019 when repo rates spiked to 10%, it signals stress in the funding plumbing.

The Federal Reserve operates two key facilities to maintain repo rate stability. The Standing Repo Facility (SRF) allows primary dealers to borrow from the Fed at a rate that caps repo from spiking too far above the target range. The Overnight Reverse Repo facility (ON RRP) provides a floor by offering money market funds a guaranteed rate for lending cash to the Fed. Together, these facilities form the "corridor" within which short-term rates trade, making the repo market the transmission mechanism for monetary policy.