Short-Term Debt (Money) Markets
Table of Contents
Money market securities are debt securities with a maturity of one year or less. Remembering the definition of money:
Money is anything that (1) is a medium of exchange, and (2) a store of value.
We call them money market securities because they function as money in the economy. Because they have little interest rate risk they are a good store of value.
1. Ask Llama2
2. Specific Money Market Securities
2.1. Treasury Bills (T Bills)
T Bills are short-term debt securities issued by the US Treasury. You can read about t Bills here:
2.2. Commercial Paper
Commercial paper is short term borrowing (less than 270 days) by corporations. Because these are corporate borrowers there is default risk, however the risk in generally minimal for most Commercial Paper. In fact, the chart below shows the rate on AA Commercial paper versus Federal Funds.
Commercial paper rated lower than AA may have a higher interest rate however. Ratings for commercial paper are summarized here.
When valuing/rating commercial we care about short-term solvency measures such as the current or quick ratios.
2.3. Repurchase Agreements (Repos)
Repos are the most important security that you have never heard of. They are simply collateralized loans, however these loans can be very useful for managing cash and a firm's balance sheet.
2.3.1. Repo Use by the Fed
The Fed often uses repos to make short-term adjustments to monetary policy. See the Fed's use of reverse repos in the chart below. Note, a in a reverse repo you are just taking the other side of a repo—so you are buying an assets with an agreement to resell the asset at a set price. So, the Fed uses reverse repos to temporarily increase the money supply. In the chart below you can see the Fed temporarily increasing the money supply by over $2 trillion in from 2021 to 2024.
2.3.2. Repo 105
Repo 105 is an (extreme) example of how banks can use repos to manage their balance sheet. Repo 105 was the name of the repo Lehman used to move poorly-performing assets off their balance sheet prior to taking the balance sheet snapshot. Once the snapshot was taken, Lehman repurchased the bad assets. See more here.