Investors were jolted last week when rates in an obscure part of the U.S. lendin...
NEW YORK - Investors were jolted last week when rates in an obscure part of the U.S. lending market spiked, prompting fears of bigger problems for the financial market and broader economy.
Cash available to banks for their short-term funding needs all but dried up early last week, and borrowing costs in the $2.2 trillion repurchase agreement - or repo - market soared as high as 10% at one point on Tuesday, about four times the Federal Reserve’s policy rate. That forced the Fed to inject hundreds of billions of dollars in temporary cash into the banking system the past few days, its first major market intervention since the financial crisis more than a decade ago, to prevent borrowing costs from spiraling even higher.
A key difference between now and 2008 is the reason for the spike in the repo rate. In 2008 it was mostly about rising counter-party risk, effectively the fear among banks that they would not be paid back, that upended the market.
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