Repurchase agreement (repo).

In plain English

A repurchase agreement, called a repo, is overnight or very short-term borrowing backed by securities, most often U.S. Treasuries. The borrower sells the securities and commits to repurchase them on a set date at a higher price, and that price difference is the interest. If the borrower fails to repurchase, the lender keeps the securities. Because the collateral is high quality and the term is short, repo rates sit near the lowest borrowing rates in the market. Banks, dealers, and money market funds use repo to fund positions and to park cash, which makes it one of the plumbing markets everything else rests on.

01Why it matters

Repo is where large institutions get day-to-day cash, so when repo rates spike it is an early sign that funding is getting tight across the whole financial system.

02The math, step by step

Say a dealer sells 10 million dollars of Treasuries today and agrees to buy them back tomorrow for 10,001,000 dollars. The 1,000 dollar difference is the interest for one night. Scaled across a 360-day year, that single night works out to roughly 3.6 percent a year.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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