Trouble in the Repo Market

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According to the Bank for International Settlements, the Financial Times reports that turmoil in the repo market was fueled by hedge funds need to borrow cash in order to drive returns on trades.

Questions:

  1. What is the Repo market?
  2. Why is the pullback by bank lending a bad sign?
  3. Explain the increasingly popular hedge fund strategy involving the purchase of US Treasuries, with respect to the repo market.
  4. Summarize (in 4 sentences or less) the concern for volatility ahead in the repo market, as reported by this article.

Source:

Stubbington, T. and J. Rennison. (2019). Hedge funds key in exacerbating repo market turmoil, says BIS. Financial Times, Dec. 8 (Retrievable online at https://www.ft.com/content/2a23313a-1843-11ea-9ee4-11f260415385)