The main money-market instruments compared
| Money Market Instrument | Typical Maturity | Risk Level |
|---|---|---|
| Repos | Overnight to 2 weeks | Very low (collateralized) |
| Treasury Bills | 4 weeks to 1 year | Risk-free (government backed) |
| Commercial Paper | 1 to 270 days | Low (investment-grade issuers) |
| Fed Funds | Overnight | Very low (interbank) |
| Certificates of Deposit | Various | Low (FDIC insured up to $250K) |
Why a repo freeze forces the Fed to act
When the repo market seizes (as it did in September 2019), the Fed must intervene immediately. Repo stress is like a blood clot in the financial system, blocking the flow of short-term funding to banks and dealers.
How a money-market seizure breaks everything
Diagnosing a repo-market freeze
Repo market 'freezes' (dealers can't roll overnight funding). What's the fundamental problem?
Check your understanding
Sit with the ideas.
A dealer finances $200 million in Treasury bonds through overnight repo at a 2.0% haircut. How much cash do they receive, and what happens if the haircut suddenly doubles to 4.0%?
Why: