Session 17 • Money Markets & Repo
T-bills, commercial paper, repo (GC vs specials), ON RRP, the funding stack, and how to actually use money market funds via brokers/banks. No math—just structure and intuition.
0) Money Markets 101 — fast, plain-English
- Money market = very short-term funding & investing (overnight → ~1 year).
- Instruments: T-bills, agency discount notes, commercial paper, CDs, repo, municipal notes.
- Users: governments, banks, corporations, funds, and households (via money market funds).
Key idea: Safety + liquidity. Investors accept modest yield to keep cash ready. Managers park cash where it’s shortest, safest, and most liquid.
1) Why money markets exist
Jobs they do:
- Smooth cash timing (payrolls, taxes, redemptions).
- Provide a store for cash (until deployed elsewhere).
- Transmit monetary policy via overnight/short rates.
Trade-offs: Yields float with policy; credit/liquidity rules limit risk but also limit return. In stress, rules may allow liquidity fees/gates in some fund types (rare, policy-dependent).
2) Examples & how to invest (Fidelity • Schwab • Rockefeller)
| Provider | Typical access |
|---|---|
| Fidelity | Retail brokerage: government/treasury money market funds; cash sweep options. |
| Schwab | Retail brokerage: government/treasury/prime (as available) funds; sweep programs. |
| Rockefeller Capital Management | Adviser platform: uses approved government/treasury funds and/or T-bills for managed cash. |
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Bank MMDA vs. money market mutual fund: Bank MMDA is a deposit (FDIC-insured up to limits). Money market mutual funds are securities (not FDIC-insured) that invest in short-term instruments and aim for $1.00 NAV with strict rules.
Video — Introduction to Money Market Funds
Short overview of what money market funds are, how they work, and where they fit.
3) What’s inside a money market fund?
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4) Repo — GC vs “specials”
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Plain English:
- Repo = short-term collateralized borrowing. One side lends cash, the other posts a bond (e.g., a Treasury) and agrees to buy it back later at a slightly higher price.
- GC: any acceptable collateral → rate tracks the policy floor closely.
- Specials: if a specific bond is scarce, demand to borrow it is high → repo rate for that bond can trade below GC.
Video — Repurchase vs Reverse Repurchase (1 minute)
Quick visual of how cash ↔ collateral trades overnight and reverses the next day.
5) ON RRP — the Fed’s Overnight Reverse Repo Facility
Context: Eligible money funds and dealers can place cash overnight at the Fed against Treasury collateral. It helps set a floor under overnight rates when cash is abundant.
Video — Repos Explained (and Why The Fed Uses Them)
A clear walkthrough of how repos support overnight funding, policy transmission, and market plumbing.
Videos — SOFR & LIBOR vs SOFR
Everything You Need to Know About SOFR
What SOFR is (Treasury repo), why it replaced USD LIBOR, and where it’s used.
LIBOR vs. SOFR: Intro, Scandals & Replacement
How LIBOR worked, why it failed, and how contracts transitioned to SOFR.
7) Why repo matters now
Three reasons:
- Policy transmission: repo sits at the core of overnight rates (and SOFR) → the cash “floor”.
- Collateral & plumbing: dealers, banks, and funds fund inventories and manage balance sheets via repo.
- Liquidity stress gauge: GC vs specials, fails, and haircuts tell you about funding conditions.
Class takeaway: If you watch only one thing for cash markets, watch short rates (SOFR, bills) and repo conditions. They ripple into mortgages, loans, and asset pricing.
8) Money market options — pros & cons
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Common mistakes:
- Chasing yield without checking fund type (government vs prime vs muni) and liquidity terms.
- Confusing FDIC-insured deposits with money market mutual funds (securities).
- Ignoring expenses, minimums, and tax treatment (muni vs taxable).
9) Homework — Debate (no math)
Prompt A “Should retail cash default to a government money fund instead of a bank sweep?”
- Pro: Market-level yields, diversified collateral.
- Con: Not FDIC; yields can fall quickly with policy; prospectus rules apply.
- Your task: One benefit, one risk, one disclosure you’d mandate.
Prompt B “Are ‘specials’ in repo a problem or a feature?”
- Pro: Price signals improve collateral allocation.
- Con: Scarcity can transmit stress; settlement frictions.
- Your task: One safeguard that preserves price signals but limits systemic risk.
Ready to check your understanding?
15 quick questions • no math • takes just a few minutes.