What is Repo Rate?

The repurchase rate generally refers to the Treasury bond repurchase rate, which is generally called the 7-day repurchase rate according to time. Think of the repo rate as the interest you need to repay using government bonds to borrow money.

Repo rate

Repurchase rate

Banks hold bonds with each other, and there will be a repurchase rate when the bank conducts repo transactions. Regardless of the number of days, the repo rate is expressed as an annualized rate. For example, the 7-day repo rate is 4%. The actual 7-day repo rate should be 7/360 * 4% = 0.0778%. For example, I have

So-called

According to the general definition,

Affect short-term market interest rates

Due to the huge volume of market repo transactions today, the repurchase rate formed has essentially become a representative of short-term market interest rates, and as a basic pricing measure for people to measure various types of investment. When the central bank is conducting a positive repurchase operation, it will form a trend to guide the rise of short-term market interest rates, which may in turn lead to an upward trend in medium and long-term interest rates. Under normal circumstances, an increase in market interest rates will cause an increase in the issuance rate on the primary bond market. At this time, issuers are willing to issue short-term bonds to reduce the cost of issuing bonds. For the secondary bond market, under the influence of opportunity costs or discount factors, The price of bonds, especially those of medium and long-term bonds, will show a downward trend due to rising interest rates. Conversely, when the central bank conducts reverse repurchase operations, its repurchase rate is usually lower than the market repurchase rate , which plays a role in curbing the rise of the market repurchase rate , and may even cause the short-term interest rate to decline, thereby driving the medium and long-term interest rate The downward trend of the bond market has lowered the issuance rate of the primary bond market. At this time, issuers are often more willing to issue long-term fixed-rate bonds. For the secondary market, bond prices, especially medium- and long-term bond prices, have risen due to short-term interest rate reductions. .

Affect the adequacy of market capital

When the central bank is carrying out positive repurchase operations, the central bank appears as a borrower of funds, thereby reducing the bank's excess reserves-that is, the bank's "free money" temporarily withdraws from the market. This will directly affect the bank's ability to invest in bonds, and at the same time reduce the bank's ability to lend to enterprises, which will in turn tighten market capital as a whole, and eventually curb the market's demand for bonds. And when the central bank as the capital financial seller carries out the reverse repurchase operation, especially when the reverse repurchase operation is carried out continuously, the market capital will be abundant as a result. The impact of the adequacy of market capital on the bond market is self-evident, especially for extensive capital-driven bond markets or stock markets, which have a more significant effect.

Affect investors' psychological expectations

We know that given the basic interest rates and the capital side are basically given or unchanged, market sentiment, the psychological state of investors or speculators almost completely determine the rise and fall of the bond market. The positive and reverse repo operations of the open market of the central bank are powerful external information, and its demonstration effect will naturally cause investors or speculators to guess and judge interest rates and capital, thus forming a complex market sentiment. In fact, when the central bank's open market forward and reverse repo operations are more concerned, its influence on market psychological expectations will be stronger.

The above discussion is a static analysis of the effect of the central bank's forward and reverse repo operations on the bond market from the mechanism of action. When the central bank continues to conduct positive repo or reverse repo transactions, the actual effect may be closer to the above analysis. But the reality is often much more complicated. First, due to the reversibility of repurchase transactions and their term usually does not exceed one year, central bank repurchase operations are often used as a short-term daily tool. When central bank repurchase operations are designed to stabilize short-term market interest rates, the central bank is The effect and impact of reverse repurchase operations on interest rates and capital will also be relatively neutral. Second, when other external conditions change, such as when the foreign exchange account is too large, the central bank performs a positive repurchase hedging operation, or when the central bank performs a reverse repurchase operation in response to the lack of market liquidity, the effect will be similar to the above analysis. The difference. Thirdly, due to immature or irrational behavior of market investors, the intention of the central bank to positively and negatively repurchase operations is often enlarged or weakened in a timely manner, which often results in situations where market conditions and theoretical analysis are inconsistent. In addition, due to various complex factors, the exchange bond market and inter-bank bond market are still in a relatively divided state. The specific and effective ways and effects of the central bank's forward and reverse repo operations on the two bond markets are not the same. Large policy delays will also lead to some unreasonable situations.

Because the central bank's forward and reverse repo operations belong to the macro scope of monetary policy, its operational meaning is of little significance for the specific guidance of the operation of a single bond or individual stock. However, ordinary investors should pay close attention to the central bank's forward and reverse repo operation trends from the perspective of analyzing the fundamentals of the bond market or the stock market. In the meantime, they should pay full attention to the continuity of observation.