What Is a Repurchase Agreement (RePo)?

A repurchase agreement, or repo, is a contract between two parties whereby one party temporarily lends a security to the other for cash and agrees to buy it back later at a specified price (typically one that’s slightly higher). A repo is similar to a short-term secured loan, with the security serving as collateral.

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Person passing cash and a pen over a contract or agreement. — Source: Getty Images

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Securities

A financial security is a tradeable asset that has monetary value. There are many types of financial securities, often called “securities."

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Money Market Fund

Money market funds are mutual funds that invest in short-term, low-risk securities, like CDs, municipal bonds, and U.S. Treasurys.

For example, on Sept. 17, 2019, the overnight repo rate -- which had previously been hovering around 2.5% -- spiked to about 9%. The dramatic increase was largely attributed to two events, both of which had occurred on Sept. 16: Quarterly corporate taxes were due, and $54 billion of long-term Treasury debt settled. As a result, about $120 billion was drained from bank reserves in just two business days.

The Fed responded by offering up to $75 billion in daily repos for the rest of the week and increasing its daily lending while lowering its long-term lending to stabilize interest rates.

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About the Author

Robin Hartill, CFP, is a contributing writer at The Motley Fool. Robin’s work has also been published by Yahoo Finance, USA Today, and Penny Hoarder. She is a graduate of the University of Florida.

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