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The Week Ahead: Working to avoid a rerun

Tom Hudson, Miami Herald on

Published in Business News

An old saying in the investment markets is that history does not repeat, but it rhymes.

There's a warning embedded in the axiom. And it's one that has the attention of the Federal Reserve.

For months the central bank has been pumping billions of dollars into an enormously important but largely opaque corner of the financial markets. It will step up its funding of the repo market as the year comes to an end in hopes of staving off any cash crunch.

The repo (short for repurchase) market is a $2 trillion-plus part of the inner workings of the global financial system. These are ultra-short term loans, oftentimes between big mutual fund money markets loaning money for one day to banks, hedge funds and others that pledge their investments as collateral. In September, repo borrowing rates shot up. Some blamed a September tax date for cash drying up, and driving up the repo rate. Bond investors also had to pony up the cash in mid-September for government bonds they had committed to buying. The Fed stepped into the repo market to settle it down, marking its most significant market intervention since the Great Recession.

And it appears the bank wants to get ahead of any potential repeat in the week ahead. The last tax installment of the year for corporations is Monday. That's also the day investors who agreed to buy $78 billion worth of new government bonds have to pay for them. Both could suck available cash out of the overnight repo market leading to a replay of September's troubles.

The Fed is ready to send $120 billion into the repo market each day, as it has since October. It hasn't always felt it necessary to push all that cash into the market, but it's prepared to do so.

Cracks in this obscure part of the financial system may seem far afield for long-term investors. However, volatility in the repo market can quickly reverberate.

 

About The Writer

Financial journalist Tom Hudson hosts "The Sunshine Economy" on WLRN-FM in Miami, where he is the vice president of news. He is the former co-anchor and managing editor of "Nightly Business Report" on public television. Follow him on Twitter @HudsonsView.

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