{
  "id": "e7b235be-9109-5fa0-bd58-e930b3cd32ca",
  "slug": "repo",
  "term": "Repo",
  "aliases": [],
  "category": "Fixed Income",
  "category_slug": "fixed-income",
  "difficulty": "intermediate",
  "definition": "A Repo (short for Repurchase Agreement) is a short-term secured borrowing transaction in which one party sells securities to another with a simultaneous agreement to repurchase those same securities at a specified future date and price, with the difference between the sale price and the repurchase price representing the interest payment (repo rate) on the effectively collateralized loan. Repo markets are a critical source of short-term funding for banks, broker-dealers, and hedge funds, and the primary mechanism through which central banks implement monetary policy through open market operations.",
  "key_takeaways": [
    "In a repo, the seller (cash borrower) is the party conducting the repurchase agreement; the buyer (cash lender) receives the securities as collateral and earns the repo rate.",
    "The haircut applied to collateral (the percentage by which collateral market value exceeds the loan amount) varies by collateral quality and market conditions, reflecting the lender's protection against collateral price declines.",
    "General collateral (GC) repos use a broad class of high-quality securities as collateral; special repos are collateral-specific (driven by demand to borrow a particular security) and typically trade at lower rates than GC.",
    "Repo rates are closely tied to central bank policy rates and the availability of high-quality liquid assets; repo market stress — as occurred in September 2019 when overnight rates spiked to 10% — signals underlying liquidity imbalances.",
    "Negative carry arises when the cost of repo financing (the repo rate) exceeds the yield on the securities being financed, making leveraged bond positions costly to maintain."
  ],
  "detailed_explanation": "The repo market is the circulatory system of modern financial markets — it channels short-term cash from cash-rich institutions (money market funds, central banks, corporations) to leveraged institutions (banks, broker-dealers, hedge funds) that need secured financing for their balance sheets. The U.S. repo market alone transacts approximately $2–4 trillion per day, dwarfing other short-term funding markets and making it a critical infrastructure component of global financial stability.\n\nThe mechanics of a standard overnight repo are straightforward. A bank or hedge fund that owns $100 million in Treasury securities but needs cash sells those securities to a money market fund for $99.9 million (reflecting a 0.1% haircut) with an agreement to repurchase them tomorrow for $99.91 million. The $10,000 difference between the sale and repurchase price represents one day's interest at an annualized rate of approximately 3.65%. The money market fund earns a secured, overnight return; the bank receives $99.9 million in cash for one night's use. The next morning, the bank buys back the Treasuries and returns the cash, plus interest.\n\nHaircuts are a critical risk management parameter in repo transactions. The haircut represents the overcollateralization — the buffer between the collateral's market value and the loan amount — that protects the cash lender if the borrower defaults and the collateral must be liquidated. For Treasury securities, haircuts are typically 0–2%, reflecting their deep liquidity and price stability. For corporate bonds, haircuts may be 5–10%; for structured products and less liquid assets, haircuts can exceed 20–30%. During the 2008 financial crisis, haircuts on non-government collateral spiked dramatically as lenders became unwilling to accept anything but the safest collateral, effectively triggering a 'run' on the repo market as borrowers found their funding lines suddenly unavailable.\n\nFor hedge funds and leveraged investors, the repo market provides the primary mechanism for financing leveraged bond positions. A fixed income relative value fund that wants to hold $1 billion in Treasury bonds with only $50 million in equity capital finances the remaining $950 million through the repo market. The difference between the bond yield (e.g., 4.5%) and the repo rate (e.g., 4.3%) — the carry — of 20 basis points is the return to the leveraged position before hedging costs. When the repo rate rises above the bond yield, the position generates negative carry, an ongoing cash drain that eventually forces deleveraging if not offset by price appreciation or spread tightening.",
  "example": "A hedge fund buys $500 million of 10-year Treasury notes at a yield of 4.40%, financing the purchase via overnight repo at a rate of 4.25%. The fund receives $500 million in cash from its prime broker repo counterparty (at a 0% haircut for Treasuries), pays overnight interest of 4.25%/365 × $500M = $58,219 per day. The daily carry from the position is: coupon income = 4.40%/365 × $500M = $60,274, minus repo cost = $58,219, net = $2,055 per day, or approximately $750,000 per year on a $500M position funded with only $20 million in capital (approximately 25:1 leverage). If repo rates rise above the coupon yield, the carry turns negative, requiring the fund to either accept the ongoing cash drain or unwind the position.",
  "formula": "Repo Rate = (Repurchase Price - Sale Price) / Sale Price × (360 / Days)",
  "formula_latex": null,
  "interactive_type": "calculator",
  "calculator_id": null,
  "related_terms": [
    "asset-backed-security",
    "basis",
    "bond",
    "deleveraging",
    "equity",
    "financial-crisis",
    "floating-rate-note",
    "haircut",
    "hedge-fund",
    "hedging",
    "leverage",
    "libor",
    "liquidity",
    "monetary-policy",
    "negative-carry"
  ],
  "backlinks": [
    "accrued-interest",
    "basel-iii",
    "blind-auction",
    "certificate-of-deposit",
    "documentation-risk",
    "floating-rate-note",
    "libor",
    "par-value",
    "reverse-repo",
    "spot-rate",
    "tokenization",
    "wild-card-option",
    "yield-curve-steepener"
  ],
  "cross_references": [
    "basis",
    "bond",
    "deleveraging",
    "equity",
    "financial-crisis",
    "haircut",
    "hedge-fund",
    "hedging",
    "leverage",
    "liquidity",
    "monetary-policy",
    "negative-carry",
    "overcollateralization",
    "prime-broker",
    "relative-value",
    "repurchase-agreement",
    "yield"
  ],
  "tags": [
    "level:intermediate",
    "cat:fixed-income"
  ],
  "asset_classes": [
    "fixed-income"
  ],
  "regulators": [],
  "see_also": [],
  "sources": [],
  "wordcount": 795,
  "checksum": "74abdd7aa01e8bf1",
  "version": "2026.05.03",
  "license": "CC-BY-4.0",
  "updated_at": "2026-09-07T02:15:24+00:00",
  "_links": {
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    "markdown": "https://hedgefund.wiki/api/v1/terms/repo?format=md",
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    "category": "https://hedgefund.wiki/api/v1/categories/fixed-income",
    "schema": "https://hedgefund.wiki/schema/term.schema.json",
    "html": "https://hedgefund.wiki/#/terms/repo"
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}