Money Market Disconnect

Abstract

A repurchase agreement (repo) is a source of cash and collateral. We document that the money market is more segmented when the collateral motive prevails. Two crucial aspects of the central bank framework lead to this disconnect: banks' access to the central bank's deposit facility and assets' eligibility for quantitative easing (QE). We show that repo rates lent by banks with access to the deposit facility and secured by QE eligible assets are more collateral-driven and disconnected from funding-based money market rates. Our results are relevant for different monetary policies and have suggestive implications for the monetary policy pass-through.

Quantitative Easing, the Repo Market, and the Term Structure of Interest Rates

“…Traders prefer the former and bid up their prices. 4 A more recent phenomenon involves QE, in which central banks purchased large quantities of several bonds, making many of them special (see Arrata et al, 2020;Ballensiefen et al, 2023). We designate bonds subject to excess demand as "special."…”