What are the effects of the repo rate
"A volatile repo rate is by no means a sign of an impending crisis"
The US repo rate has seldom received as much attention from financial markets and media as it has recently. The reason for this is the short-term increase in the repo rate to 10 percent on September 17th. Vincent Reinhart von Mellon, a company of BNY Mellon Investment Management, sees no sign of an impending crisis in this increase.
In principle, repo transactions give banks quick access to liquidity. A commercial bank buys securities from another bank with an agreement to buy them back the next day. The rise in the repo rate can therefore be a sign that banks are no longer lending to each other. This in turn fuels speculation about a possible systemic problem in the financial system - as it did during the financial crisis. That begs the question of whether the banks are in trouble.
Banks wanted to hold larger reserves
"We don't think so. Rather, it appears that the increase was due to a series of random events," said Vincent Reinhart, chief economist at Mellon, a company of BNY Mellon Investment Management. After injecting ample liquidity into the banking system for a decade, the central bank gradually reduced its holdings of securities over the past two years, and with it its reserves.
In addition, the US Treasury received billions in tax revenue in mid-September, as did the proceeds from some large securities auctions. As a result, the central bank's balance sheet swelled by $ 200 billion, and roughly the same amount of liquidity was withdrawn from commercial banks. "The banks, on the other hand, wanted to hold larger reserves than the Fed made available, and because these were not available on the money market, the repo rate rose sharply," says Reinhart.
It is unclear how much liquidity the central bank has to provide
Fed President Jerome Powell recently stated that it was unclear to what extent liquidity would have to be made available by the central bank in order to keep the repo rate at a stable level. This is not new news, however, as finding the right balance between supply and demand for the Fed has always included an element of trial and error.
"The current volatility clearly shows, however, that the central bank may have misjudged the situation, although it recognized the problem relatively quickly and temporarily made 75 billion dollars available to the banking system," said Reinhart. The amount has since increased to $ 100 billion.
The ten years since the financial crisis are unique in the financial markets because the US Federal Reserve flooded the banking system with liquidity and thereby significantly narrowed the fluctuation range of the repo rate. Before the financial crisis, the Fed's balance sheet was significantly shorter and the central bank was far more reluctant to provide permanent liquidity. Sudden changes in the repo rate were common at the time, as were short-term measures to ensure liquidity. The central bank provided the repo market with around 200 days of liquidity per year.
Historically, the approach taken by the central bank is not unusual and until the Fed decides to permanently increase reserves, it will continue to provide liquidity to the repo market. "Since there is no guarantee that the Fed will find the right balance straight away, investors should be prepared for the fact that volatility in the repo market will continue to increase," the chief economist points out.
Massive investments in quantum technology
May 20, 2021, 5:00 a.m.
Companies expect quantum computers to have a significant impact on their business model. According to a study by Roland Berger, one of the first areas of application will be the solution of optimization problems. Especially...read article
The vanished paradise
May 19, 2021, 2:48 pm
In the pursuit of growth at all costs, the tiny island nation of Nauru has consumed its natural capital. The story of the "economic paradise" Nauru shows perhaps better than any other the decay at the end of a ...read article
Euphoric investor confidence despite many uncertainties
May 18, 2021, 11:34 am
The almost euphoric investor confidence is in stark contrast to the medium-term prospects for the economies and political courses everywhere, says James Athey of Aberdeen Standard Investments. ...read article
"Fear of acute inflation is unfounded"
May 17, 2021, 6:01 pm
Rising prices are currently causing unrest and concern. According to BAK Economics, however, fears of escalating inflation are exaggerated, at least in the short term and especially for Switzerland ...read article
Bright prospects for Asian equities
May 17, 2021, 10:44 am
Asia's response to the 2020 pandemic benefited the region. Since there is a risk of bubbles forming in some areas, investors now have to be wide awake when choosing stocks, says ...read article
Why Impact Investing Isn't About Charity
May 17, 2021, 8:59 am
Investing to make an impact has tremendous potential to solve some of the world's greatest challenges. Therefore, it would be more than unfortunate if some common myths were about the growth of ...read article
In the end a European model of success
May 15, 2021, 5:00 a.m.
The European CO2 price system is becoming more and more important, also for investors. It therefore deserves more attention, according to the DWS. Rising carbon prices could well exceed Europe's borders ...read article
What does "net zero" actually mean?
May 14th, 2021, 5:03 pm
In order to limit global warming to 1.5 ° C compared to pre-industrial times, it is necessary to reduce global greenhouse gas emissions to "net zero" by 2050 at the latest. Avenir Suisse explains what ...read article
Private markets are catching up quickly with sustainable investments
May 14, 2021, 10:44 am
The world needs massive investment to meet a wide variety of environmental and social challenges. Investors can be at the forefront of change, says Will Nicoll of M&G Investments. One ...read article
Climate change - a pressing problem opens up investment opportunities
May 11, 2021, 5:00 a.m.
The planet earth is facing a rapidly growing threat. The climate is changing at an alarmingly fast pace. Indispensable natural resources like clean drinking water will always ...read article
Mobility: The boom is entering the next round
March 18, 2021, 5:19 pm
The mobility industry has benefited from the corona crisis. The structural framework conditions are right and are particularly beneficial for electric vehicles, says George Saffaye from Mellon in ...read article
US government change has little impact on long-term market returns
January 21, 2021, 9:42 am
January 20, 2021 marks the inauguration of the new US President Joe Biden in the annals. It also heralded a change of direction in American economic policy ...read article
SNB with CHF 37.7 billion profit in the first quarter
April 29, 2021, 2:55 pm
The SNB's profit in the first quarter of 2021 is due to foreign currency positions, which brought in CHF 39.9 billion. The National Bank also has data on the assets of private ...read article
US Federal Reserve sticks to loose monetary policy
04/29/2021, 10:41 am
The US Federal Reserve is sticking to its historically loose monetary policy, but at the same time is a little more confident about the US economy. As expected, the key rate remains at the very ...read article
Subscribe to our newsletter and receive the investrends.ch news twice a week.
- How long does inpatient drug rehabilitation take
- Why do companies hire ethical hackers
- Will China collapse in 2045
- What is so fascinating about family trees
- The British like the Russians
- Can I use croutons for bread pudding?
- What is the need for human resource management
- What is your country's festival
- Offers Google accommodation for interns
- What's good in a love marriage
- How do I sell in wholesale
- Have users been harassed by Quora administrators?
- Where do the white Americans come from?
- How can US citizens support Hong Kong?
- Which Chinese province has the cutest girls?
- In today's society, what counts as dating is what counts
- How much do cigarettes cost in Canada
- Did Trump inspire the MeToo movement
- What fruit is the master of fruits
- How do you get selected for ISRO
- Why is Nepal called a melting pot
- Mothers instinctively protect children
- How do you start an export business
- What family is means and stands for it
- Is the Bible anti-gay
- Why is it cool to hate America
- What made you want to become a Wicca
- What jobs do you admire
- What does it mean to enjoy life
- How is life at SIMS Pune
- Is blockchain technology sustainable
- Why do the Bengali eat rice
- Economists need math