Chapter 12

Repurchase Agreements and Financing

This chapter is about repurchase agreements or repos, which were introduced in the Overview. Repos are short-term contracts that are used to lend money on the security of usually high-grade collateral, to finance the purchase of bonds, and to borrow bonds to be sold short.

Financial institutions have traditionally relied on repos to finance some portion of fixed income inventory. Repo financing, as secured, short-term borrowing, is typically a relatively inexpensive way to borrow money. The practice can leave firms in a perilous situation, however, should lenders of cash through repos, in times of trouble, fail to renew their loans. This turned out to be an issue in the financial crisis of 2007–2009, which is illustrated in this chapter by two cases, one about liquidity management at Bear Stearns and one about the financing relationship between Lehman Brothers and JPMorgan Chase.

The last part of the chapter focuses on repo rates and, in particular, on the specials market in the United States, where market participants lend money at relatively low rates predominantly in order to borrow the most-recently issued and most liquid U.S. Treasury bonds. The behavior of these rates is examined in some detail and linked empirically to the auction cycle of U.S. government bonds.


A repurchase agreement or repo is a contract in which a security is traded at some initial price with the understanding that ...

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