What is ACTUALLY going on in the repo market and what do Hedge Funds have to do with it?

WHY did the repo market go CRAZY in September 2019? DISCOVER the role banks and hedge funds played in the overnight funding debacle we witnessed that led to the Federal Reserve injecting billions of dollars into the system DAILY.
OVERVIEW
Repo is a generic name for repurchase transactions.
In a repo transaction, one party sells an asset (such as Treasury Bonds) to another party at a set price. The seller commits to repurchase the same assets from the same party at some future date. If the seller defaults, the buyer is free to sell that asset to a third party to offset their loss.
Repos are a way for borrowers to raise short-term funding by agreeing to buy and sell securities over very short timeframes. In practice they function much like a collateralized or secured deposit, and are a vital part of the financial system.
Check out more at my blog: enlightenmentinvesting.home.blog
Banks had become increasingly active in the repo market in recent years, lending out some of the surplus money they hold at the Federal Reserve to earn a little extra return in a safe and liquid way.
One increasingly popular hedge fund strategy involves buying US Treasuries while selling equivalent derivatives contracts such as interest rate futures, and then pocketing the difference. This is an arbitrage strategy that hedge funds use that would generally yield small profits.
In some cases, hedge funds take those Treasury securities they own, and place it as collateral in the repo market for cash. Those hedge funds then use that cash to increase the size of their trade and buy more Treasuries, and place it as collateral in repo market for cash once again. This process can be repeated over and over to leverage off the potential returns of this trade.
The arbitrage strategy above was once popular amongst dealer banks themselves. However, higher capital charges have led to their displacement by hedge funds, due to hedge funds greater ability to take on the risk of this trade.
I believe much of the volatility in the overnight repo markets has to do with these large moves in Treasuries, which increased volatility in any trade related to Treasuries, which in turn would have an effect on leveraged trades made by hedge funds on Treasuries. Banks may have recognized this, and grew reluctant to provide cash funding to this market for this and other regulator reasons.

[@pinkpalmsmusic]

fantastic stuff. thanks

[@blank7958]

So the hedge funds are borrowing at the short-term repo rate by using treasuries as collateral but it sounds like they still get the interest from the treasuries even though they are sold overnight. So they are borrowing short and investing long to get the spread? Then, they are able to keep leveraging this trade to amplify returns. It seems like this trade makes sense in a rate decreasing environment when longer-term treasuries would increase in value?

[@kevtron]

What is that trading strategy referred to? There's a term for it but I can't remember it

[@Rey_B]

very appropriate explanation thanks

[@robgoren8628]

Excellent. Thanks.

[@octaveful]

Thanks Trader count could you explain the relationship between repo haircut and maximum theoretical leverage in a future video?
Many thanks,
Arthur

[@sahhaf1234]

Thanks. Pls give more explanation on how hedge funds work..

[@WallaceRoseVincent]

By the way, are you now working in the financial industry as a bid data or python programmer?!?

[@falakoala4579]

Great explanation, you should return to making videos