Jerome Schneider, Head of Short-term Portfolio Management: Ever since the financial crisis of 2008, people have become increasingly focused on the repo markets and funding markets as a signal of deterioration of credit appetite as well as liquidity conditions.
Shots of PIMCO employees working.
At PIMCO, we've been focused on the repo markets for more than four decades, and as a result, we feel that they are real time barometer of not only the cost of liquidity but also the cost of capital in the marketplace, and utilize them in our short term desk as a proxy for where we think short term rates should be in the context of opportunity sets to invest cash defensively.
Shot of U.S. Federal Reserve Building
Photograph of Federal Reserve Chairman, Jerome Powell
While the Fed's Open Market Operations have alleviated a lot of the short term concerns, when we get into periods of stress that we're currently seeing, repo markets are routinely looked at as the source of that stress.
While repo rates are relatively elevated currently, the signs of stress are pretty limited. Simply put, repo markets are functioning, and as a result—although rates are elevated—there's no uncertainty or shortage of liquidity insofar as that the Federal Reserve continues their open market operations as they have continued to do over the past few weeks.
One of the concerns that we have is clearly that repo markets fail, and more importantly, that dealer balance sheets are reduced so that repo market allocations become reduced. But there's no signals of that right now. And many of the concerns that were prevalent in 2008, including counterparty risks, are simply not apparent at this point in time and should not be a concern for investors.
As a result, we actually view repo as being a great investment in terms of overnight repurchase agreements providing a tremendous amount of liquidity on an over-collateralized basis to clients.
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