Who is driving the massive surge in repo borrowing?

{"text":[[{"start":6.34,"text":"Some people spend their time thinking about the nature of the divine, the singularity, geopolitical fragmentation or how to cure cancer; others spend their time pondering the repo market. Alphaville is in the latter camp."}],[{"start":19.5,"text":"In case you missed it, here’s a 4k word deep-dive into the repo market’s origin story that ran in the FT Magazine earlier this month. If that doesn’t float your boat, the tldr is that repo is short-term collateralised lending that helps grease the wheels of the financial system’s machinery."}],[{"start":35.98,"text":"And repo is huge. The Financial Stability Board estimated earlier this year that the global government bond-backed repo market stood at approximately $16tn at the end of 2024."}],[{"start":47.92,"text":"Given the FSB’s estimate that sovereign debt-linked repo accounts for about 80 per cent of the total (and assuming that ICMA’s latest European growth estimates are broadly representative) that would make the global total about $22tn today."}],[{"start":null,"text":"

"}],[{"start":61.74,"text":"But who uses the repo market? Who are the biggest lenders and who are the biggest borrowers? What has driven the big upswing we’ve seen over the past decade."}],[{"start":72.42,"text":"Unfortunately, repo is a remarkably opaque industry, but analysts at several US bodies — like the Federal Reserve System and Office of Financial Research — have been digging a lot into it in recent years. And yesterday the NY Fed published a new report looking at the identity of the main repo market players in the US."}],[{"start":91.26,"text":"Anyone who has read Alphaville will probably be unsurprised at their findings:"}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":95.62,"text":"The main borrowers have long been hedge funds, but their dominance has become incredibly stark over the past decade. They do also lend (to the tune of $1.3tn in late 2025) to squeeze returns out of any cash they hold and to turn cash into securities, but this is dwarfed by their now $3tn of borrowing as of January 2026."}],[{"start":117.14,"text":"For the sake of clarity, FBOs are the US branches of foreign banks, USDIs are US-based deposit-taking banks, and REITs are real estate investment trusts."}],[{"start":127.46,"text":"Note that this data is derived from certain US reporting forms, and Alphaville suspects that they only capture some of the multi-faceted repo market. That’s not to say that hedge funds are the biggest actors across every corner of the repo market — banks also use repo to fund their internal trading desks, for example — but this can safely be assumed to be a conservative estimate."}],[{"start":150.94,"text":"That hedge funds are big repo market borrowers and money market funds are big money market lenders has been known for a long time. But the scale of the recent increase — the Fed’s estimate for hedge fund repo borrowing has nearly trebled since October 2022 — piqued Alphaville’s interest. In fact, this data indicates that most of the growth in repo has been solely driven by hedge funds."}],[{"start":174.1,"text":"At the same time, as Adam Josephson at Sakonnet Research has highlighted, non-Treasury collateral has become far more common lately, at least in the triparty repo market."}],[{"start":null,"text":""}],[{"start":184.38,"text":"And in case you’re curious, this massive pile of short-term leverage is one of the main reasons why the Federal Reserve had to start increasing the size of its balance sheet again last year. After all, when so much financial activity relies on a short-term debt market then you have to do what it takes to avoid any jitters."}],[{"start":202.5,"text":"It will be interesting to see if Fed chair Kevin Warsh ever actually tries to do something about the central bank’s balance sheet. Given how tricky it could prove we suspect not, but there’s an argument that introducing some volatility in repo could be a healthy thing in the longer run."}],[{"start":221.22,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1790727458_5034.mp3"}