Repo rate

A repurchase agreement is a sale of securities combined with an agreement to buy them back on a stated date at a stated price. Economically it is a secured loan: one side has the cash, the other keeps the exposure to the securities, and the difference between the two prices, annualised over the term, is the repo rate. The same transaction seen from the cash lender's side is called a reverse repo. Because the loan is collateralised, the rate sits below what the same borrower would pay unsecured for the same term.

The phrase carries two distinct meanings and context decides which is intended. The first is the market rate at which banks and funds actually fund themselves overnight against government collateral, which is where money market stress becomes visible before it appears anywhere else. The second is a policy rate: several central banks conduct their operations as repurchase agreements and name their official rate accordingly, and the European Central Bank's main refinancing operations are structured that way.

Two details are routinely missed. Collateral is not fungible: a specific security in heavy demand can trade special, meaning the rate for lending cash against that particular security falls far below the general collateral rate, which is a statement about demand for the security rather than about interest rates. And repo rates are money market rates quoted on a day count convention that may divide by three hundred and sixty rather than three hundred and sixty five days, so a rate compared against a bond yield without adjusting for the convention is not being compared like for like.