It works really well, until it suddenly doesn’t.

By Wolf Richter for WOLF STREET.

The size of the repo market has ballooned to over $13.5 trillion in outstanding agreements daily, according to the government’s Office of Financial Research (OFR). Via the repo market, financial institutions borrow from, and lend to, each other mostly overnight, but also for longer periods, such as for one week, secured by high-quality liquid collateral with a “haircut.”

About 70% of repos are secured by Treasury securities. The rest are secured by agency securities, such as MBS issued by government-sponsored enterprises (GSEs Fannie Mae and Freddie Mac), and also high-grade corporate bonds and Asset-Backed Securities (with a bigger haircut, the bigger the risk, the bigger the haircut).

Some institutions lend cash to the repo market for the yield and liquidity, such as money market funds. Others lend cash to the repo market to borrow Treasury securities they need for margin requirements on other trades, such as hedge funds. Dealers act as intermediaries between lenders and borrowers.

An analysis by the New York Fed today outlines who the biggest borrowers and lenders in the repo market are.

Biggest cash borrowers in the repo market: Hedge Funds.

Far ahead: Hedge funds (HFs) engaged in the “basis trade” borrowed $3.0 trillion in the repo market as of July 2025, up from $2.5 trillion in July 2024, $1.1 trillion in July 2022, and $664 billion in July 2017, according to the New York Fed’s analysis today (top red line in the chart below).

With the “Treasury cash-futures basis trade,” hedge funds purchase Treasury securities and sell Treasury futures contracts, thereby profiting from the spread between them. But the spread is small, so they lever up their strategy by borrowing cash in the repo market, and putting up the Treasury securities as collateral, thereby multiplying their returns through vast amounts of leverage.

Hedge funds in the basis trade provide liquidity in the Treasury market, as they’re big leveraged buyers of Treasury securities.

But when the basis trade encountered a rough spot in March 2020, and hedge funds had to unwind some of their positions, the Treasury market locked up. The effort to untangle this issue was one of the reasons the Fed cited for its massive Treasury purchases in March 2020.

The Fed has cited hedge funds, with their vast leverage and dense opacity, as a primary risk to financial stability, and they didn’t disappoint in March 2020, and again came to the Fed’s attention for their part in the repo market blowout in the fall of 2019.

Far behind, the next 3 largest borrowers: US branches and agencies of “Foreign Banking Organizations” (FBOs) at $445 billion; US banks (US Depository Institutions or USDIs) at $422 billion; and Real Estate Investment Trusts (REITs), especially mortgage REITs, at $313 billion, as of October 2025, for a combined $1.2 trillion.

Chart via the New York Fed, sources: OFR, Federal Financial Institutions Examination Council (FFIEC), and the St. Louis Fed’s FRED database.

Biggest cash lenders in the repo market: money market funds.

Far ahead: Money market funds (MMFs) lent $3.0 trillion to the repo market as of January 2026, having tripled from July 2020. The high occurred in April 2023 at $3.3 trillion (top gray line in the chart below).

Lending to the repo market provides MMFs with short-term investments, including overnight with next-day liquidity, in high-grade securities, backed mostly by Treasuries. Overnight repos allow MMFs to manage their redemptions while keeping their cash invested.

Total MMF balances rose by nearly $1 trillion over the past 12 months, to $8.4 trillion in Q2 2026, including a record $5.1 trillion held by households, and a substantial portion of that was invested in the repo market.

Far behind: Hedge funds (HFs) lent $1.3 trillion to the repo market as of July 2025 (red in the chart below), in part to invest short-term their otherwise uninvested cash; and in part for “collateral transformation” purposes through a dealer where they in effect borrow Treasury securities from the repo market that they then post as collateral, such as to meet strict margin requirements for derivative trades. Hedge fund leverage is multi-layered and complex.

On net, hedge funds are far bigger borrowers from the repo market ($3.0 trillion), than lenders to the repo market ($1.3 trillion), with net borrowing amounting to about $1.7 trillion at that time.

Further behind: US banks (USDIs: $689 billion, brown line, as of October 2025); US branches of foreign banks (FBOs: $419 billion, light blue line, as of October 2025), and the GSEs ($249 billion, dark blue line, as of July 2025):

Chart via the New York Fed, sources: OFR, Federal Financial Institutions Examination Council (FFIEC), and the St. Louis Fed’s FRED database.

The $13.5 trillion repo market interconnects a large spectrum of financial institutions, including dealers, banks, hedge funds, money market funds, and the GSEs, through short-term cash and collateral exchanges.

Due to the repo-market interconnectedness and vastness, liquidity problems in one corner of the repo market – visible when repo rates, such as SOFR, soar – can spiral out into the rest of the financial system in no time.

To tamp down on liquidity issues before they spiral out into the financial system, the Fed set up its Standing Repo Facility (SRF) in July 2021, where approved banks can borrow from the Fed at its SRF rate (4.0% since the rate hike on Sep. 16) and a haircut to lend to the repo market to profit from the spread and bring down repo rates again in the process, which is what they did during the repo market squiggles in September through December 2025, that might have spiraled out into the financial system otherwise:

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