Some investors are concerned that recent turmoil in a key short-term cash market where banks borrow to fund operations could exacerbate difficulties trading bonds. Spikes in the cost of overnight loans using repurchase agreements, or repos, could hit bond trading in two ways, investors and analysts said. Rising repo rates make it more expensive for securities dealers to borrow money and to hold government bonds—actions they take frequently to facilitate client trades and manage their risks. In the repo market, where banks and money-market mutual funds typically lend cash for periods as short as one night in exchange for safe collateral such as Treasurys, rates surged as high as 10% last month from about 2.25% amid an unexpected shortage of available cash in the financial system. Bond investors tend to worry about liquidity, or the ability to buy or sell a particular security, because the market doesn’t have a central exchange and a lack of trading partners could create wide gaps in prices at times of market stress. Differences in the various features of corporate bonds, which are often issued in relatively small sizes, can also make trading difficult. “If repo rates keep getting higher, the economics of making markets is going to be that much worse,” said Peter Yi, director of short-duration fixed income at Northern Trust. Elevated repo rates could make bond dealers “more selective” about the securities they are willing to buy from customers and hold on their books, making trading more difficult at times of market stress, he said. Rates surged in the middle of last month after falling reserves in the financial system, together with a handful of large cash drains including a large corporate tax payment and a government-bond auction, prompted many banks to hold on to cash rather than lending it in the repo market. In the days following the jump in repo rates, the Federal Reserve said it would provide billions of dollars in short-term loans to add liquidity to the financial system. In more recent offerings, banks requested less money than the Fed has been willing to lend, even though a large gap between the rate the Fed lent at and what banks charged has persisted. The Fed said Friday it would offer a new round of overnight cash loans in the coming weeks, as well as more new loans that have two-week terms and mature later this month through early next month. Banks asked for $47.05 billion in overnight reserves on Monday, all of which the Fed accepted. The Fed is offering $45 billion in two-week loans Tuesday. While the Fed has lent money overnight through the repo market at a typical interest rate of about 1.9%, traders have said that banks have frequently offered repo loans at rates around 2.5%. The issue of bond-market liquidity could become particularly pressing if sentiment about the economy worsens, investors said. That is because the steady growth of the economy, along with Fed interest-rate cuts, has supported bets on investment-grade and high-yield bonds.That could lead many investors with large wagers to reduce their holdings at the same time. If those overwhelm the available buyers, it could lead to large price declines, investors said. Some investors said bond dealers in recent years have been less and less willing to make markets in bonds sold by companies and even in supersafe government securities. Many dealers use money borrowed in the repo market to finance bond purchases, so increases in that rate could make them more reluctant to buy bonds.“The only liquidity in the market is the customers,” said Mark MacQueen, who manages bond portfolios as a principal at Sage Advisory. Nick Bit: Let me tell you what those assholes on the ha ha ha business TV shows and Publications and email analysis forget to tell you. The banking system is in deep distress… as inthey got NO fucking money… they are stone cold broke…. GOT IT!!!!!! iN FACT THEY ARE BEYOND BROKE. THEY NEED 700 TRILLION JUST TO GET BACK TO BREAK EVEN!!!! they are hiding mounting HUNDREDS OF TRILLIONS IN LOSES. That is why i urged you to go to cash. DO NOT BUY ANY INSTRUMENT government or otherwise. GO TO CASH!! I will let you know WHEN. US Government Treasuries are good. BUT BUT yields will be going a lot higher… HOLD OFF!. yes ther is anther Lehman moment coming…. and 5000 banks will close down… and pensioners and depositers will get screwd… that HAPPY event is 2 years i the future. Yes dead broke banks as in ALL including YOUR retierment and credit union are stone cold broke.. Even if your banker buddy is in the Rotary Club or goes to your church! He is paid to be stupid and kept in the dark fed full of shit like a mushroom!