A perfect storm hit the repo market this week, highlighting the fragility of one of the most important sources of financial market lubrication and raising concerns that the Federal Reserve’s attempt to unwind post-financial crisis intervention may have gone too far. Repurchase agreements are the grease that keeps the financial market’s wheels spinning, allowing different market participants to borrow and lend to each other to cover short-term cash needs.Effectively, they are short-term loans that banks and investors make to each other, exchanging cash for collateral, often just overnight. On Tuesday, the wheels stopped turning, with the repo rate soaring to a high of 10 per cent, when it typically trades in line with the Federal Reserve’s target interest rate of between 2 per cent and 2.25 per cent. But what exactly is going on? The answer lies in both idiosyncratic short-term issues and big, structural changes in financial markets that have occurred in recent years … [Read more...] about Why did the repo market’s wheels stop turning?