Repurchase Agreement

A repurchase agreement, commonly known as a repo, is a short-term borrowing arrangement in which one party sells securities to another with an agreement to repurchase them at a slightly higher price at a future date. The difference in price represents the interest on the loan. Repos are widely used in money markets to manage short-term liquidity needs.

A bank needing short-term cash might enter into a repo agreement, selling government bonds to a counterparty overnight and agreeing to buy them back the next day at a marginally higher price. For traders and investors, monitoring repo market conditions can provide insights into the health of the financial system. Stress in the repo market, such as sharp spikes in overnight repo rates, can signal liquidity shortages that may spill over into broader asset markets, affecting trading conditions across equities, bonds, and currencies.