Money Markets

This marketWhat it is, what trades, and the ideas it runs on.

The market at a glance

Money markets are finance's circulatory system: the short-term (overnight to one year) funding markets where governments, banks and corporations borrow the cash that keeps everything running. It is the largest and least visible part of finance: almost every other market on this site is funded here, overnight, and rolled again the next morning.

This is deliberately the most boring market in finance — near-zero credit risk, near-zero duration — and that boringness is load-bearing: money markets are where "cash" gets its meaning. When they misbehave (2008, September 2019, March 2020), everything else stops working within days, which is why central banks now maintain standing facilities to cap rates on both sides.

Who does what

• Governments roll T-bills weekly — the safe asset everyone else prices against.
• Dealers and hedge funds finance securities inventories in repo — the leverage machine of fixed income.
• Corporates and banks issue commercial paper and CDs for working capital and funding.
• Money-market funds aggregate savers' cash and lend it into all of the above overnight — the system's great intermediary and, in crises, its great accelerant.

The conventions trap

Money markets quote the same economics three incompatible ways: discount yields (360-day, off face value), bond-equivalent yields (365-day, off price), and effective annual rates. A "5.00%" bill and a "5.00%" deposit are not the same rate. The converter below translates — a small skill that marks you as someone who's actually traded this market.

Interactive: T-bill yield converterEasy

From a bill's price and days to maturity, get all three yield conventions at once.

Price (per 100 face) Days to maturity

Discount yield (360d)

—

Bond-equivalent yield

—

Effective annual

—

Same bill, three "rates" — always ask which convention a money-market quote uses before comparing anything.

How the products fit together

Everything here is the same bargain at different lengths and with different security. Treasury bills are the government borrowing unsecured for weeks and set the floor everything else is quoted against; commercial paper is a company doing the same thing and paying a spread for the difference in who is asking. Certificates of deposit and savings deposits are the bank on the other side of that trade, borrowing from depositors — one tradable, one not, which is the whole of the difference in what they pay. Building society savings contracts add a purpose to the same deposit and price it accordingly.

Repo is the one that changes the shape: the same overnight loan, but against collateral, so the question stops being who is borrowing and becomes what is pledged and at what haircut. Securities lending is that trade run backwards — the security is what is wanted and the cash is the collateral. Trade finance replaces the borrower's credit with a bank's undertaking against documents, which is why it survives where an unsecured line would not.

Two products sit on top rather than beside. Money market funds hold a portfolio of the instruments above and hand back one price, which is convenience bought with a layer nobody can see through in a hurry; a structured deposit is a deposit with a derivative bolted on, so it belongs to this market by its principal and to another one by its return.

Concepts to master

• Secured vs. unsecured — repo (collateralised) vs. CP/CD (bank/corporate promise): the spread between them is the system's credit-stress gauge, the modern descendant of the LIBOR-OIS spread.
• Collateral is money — Treasuries function as cash in this world; their scarcity or abundance (bills-OIS spread, repo specialness) moves everything.
• Runs happen here first — maturity transformation without deposit insurance means the "safest" markets host the fastest panics. Every modern crisis chapter one is a money-market chapter.
• The corridor — central banks steer these rates with floors (reverse repo) and ceilings (standing repo); reading actual prints against the corridor tells you reserve scarcity in real time.

Interactive: repo haircut & leverageMedium

The haircut looks like a technicality — 2% held back. Invert it and you see what it really sets: the maximum leverage of the entire financial system.

Haircut % Equity ($m)

Maximum leverage

—

Maximum position

—

Equity impact of a 1% price move

—

Price fall that wipes the equity

—

Leverage = 1/haircut. A 2% haircut permits 50×; hedge-fund basis trades run on numbers like these — which is why regulators argue about haircuts, not about leverage.

The same questions, asked of all elevenThese sections answer the same thing on every asset class, so the answers can be read next to each other.

The units this market speaks in

• Rates are per annum on a day count that is not the same everywhere. ACT/360 in some markets, ACT/365 in others, and the same headline rate produces different money. The conventions table.
• Bills are quoted on a discount basis, not a yield basis, in some markets — which means the quoted number is smaller than the return you actually earn. Converting between the two is the first thing anybody on this desk learns.
• Repo is two numbers: the rate, and the haircut in percent. The rate is the price of the cash; the haircut is the price of the risk. Repo.
• Term is in days, and the days are business days on a specific calendar. Overnight, tom-next, spot-next, one week — each is a distinct instrument with its own price.
• The unit of a funding conversation is the spread to the overnight rate, in basis points, not the level. Where the rate is matters far less than where you can borrow relative to it.
• Everything here is short, so a small rate on a large amount for a few days is real money. One basis point on a hundred million for a week is not a rounding error to the desk that owes it.

Who is choosing, and who is forced

Almost nobody in this market is expressing a view. The rate moves because of regulation, balance-sheet dates and collateral availability — which is why it can move sharply for reasons no forecast contains.

• Forced at quarter-end: banks managing reported balance sheets. Some ratios are measured on a date rather than on average, so the appetite to intermediate falls away in the days around it and reappears afterwards.
• Forced by rule: money-market funds. Maturity and liquidity limits are written into the product. A fund that is at its limit is not choosing when it stops buying. Money market fund.
• Forced by inventory: dealers financing positions. Securities already owned have to be funded every day, whatever the rate.
• Forced by liquidity rules: banks holding high-quality assets they would not otherwise choose, in amounts set by a formula.
• Choosing: corporate treasurers with cash to park — and even they are usually choosing between instruments rather than choosing whether to be here at all.

The lesson this market teaches the others: when everybody is forced in the same direction on the same date, the price is information about the rules, not about the risk. March 2023.

What a bad day looks like here

• The shape of it: everybody wants the same collateral, or the same currency, on the same morning. Nothing has defaulted; the plumbing has simply narrowed.
• The first tell: secured rates moving apart from unsecured ones. When lending against collateral becomes cheaper than lending without it by an unusual margin, the market is repricing trust rather than rates.
• The second tell: a specific security going "special" — borrowable only at a much lower repo rate because everybody needs that exact bond. Repo.
• The calendar part: quarter-end and year-end, when balance sheets are measured on a date. Some of what looks like stress is arithmetic, and it reverses the next morning.
• Where it has mattered: March 2023, where an institution's assets were long and its funding was short, and the run happened at the speed of an app.

How a trade actually happens here

This is the shortest clock on the site. A trade agreed at ten in the morning is often settled before lunch, and the settlement is the product rather than an afterthought to it.

• Agreeing it — a rate, a size and a date. A repo is cash lent against securities, quoted as a rate for a term that may be a single night. What makes it a repo rather than a secured loan is that the securities are legally sold and repurchased. Repo.
• Settling it — the same day, both legs at once. Cash goes one way and collateral the other, simultaneously. The entire point is that neither party is exposed to the other for longer than an instant.
• The triparty shortcut. Instead of agreeing which bonds, the two sides agree what kind of bonds; an agent then picks them, values them daily, applies the haircut and swaps one out when it is needed elsewhere. It is how a lender takes collateral without running a securities operation. Margin and collateral.
• And then it repeats. Overnight funding settles, matures the next morning and has to be done again. A balance sheet financed this way is re-underwritten every single day by people who are free to decline.
• A fund is not traded at all. Money fund shares are subscribed and redeemed at a cut-off, at the value struck for that cut-off. There is no price on a screen and no counterparty to negotiate with. Money market fund.
• When it fails: nothing is delivered, because nothing needs to be. The failure here is that the trade is simply not offered again — and rolling nothing is what a funding crisis looks like from the inside. 2008.

Where the spread is, and who earns it

Everything here is priced as a distance from the overnight rate, and the distance is small. When the whole return is measured in tens of basis points, a cost measured in tens of basis points is not a detail — it is the product.

• The bank's deposit margin. A deposit paying less than the rate the central bank pays that same bank is the difference being kept. It is not hidden; it is simply never stated as a spread, and the size of it moves with how much the bank wants deposits. Savings deposits.
• The fund's charge, against the fund's yield. A money fund's yield is what its holdings earn minus what it costs to run. When short rates are high the charge is a modest fraction of the return; when they are near zero it can be most of it. Same charge, entirely different product. Money-market funds.
• In repo, two numbers rather than one. The rate, and the haircut — how much collateral is required per unit of cash. The rate is negotiated and the haircut is where the risk appetite actually shows. A bond everybody wants to borrow goes special, and the cash lender against it earns a rate below the general one. Repo.
• The dealer in commercial paper places the issue and is paid for placing it, and the buyer's return is the discount to face rather than a coupon. Commercial paper.
• The spread that is not a fee at all. Borrowing short and lending long earns the term premium. It is not a margin anybody charges — it is payment for owning the risk that the short borrowing cannot be rolled, which is the single mechanism behind most of the case studies on this site. March 2023.

How a position here ends

These instruments end quickly and constantly, which is what makes the class useful and also what makes it fragile: an instrument that ends every ninety days has to be renewed by somebody who is free to say no.

• It matures. Days or months, and the shortness is the point rather than a limitation.
• It is rolled — and the roll is a fresh decision. Nothing obliges the lender to lend again. A borrower funding a long asset with short money is being re-underwritten every time, by people who are free to decline for reasons that have nothing to do with the borrower. This is the whole of funding risk in one sentence. Which risk decides.
• It is redeemed at par. A money fund pays out at one unit of currency per unit held — a convention that holds because the holdings are short and good, and that has broken when they were neither.
• The gate closes. A fund facing heavy redemptions can suspend them or charge for them. The rules exist to stop a first-mover advantage, and their existence is itself a reason to move first.
• The repo reverses. Cash back, collateral back, on the agreed date. If the borrower fails, the lender keeps the collateral and sells it, which is an ending that works well when the collateral is a government bond and badly when it is not.
• The facility is drawn. The backstop nobody expected to use is used, which for the borrower is an ending and for the market is a signal.

Which risk decides across this class

Every product page here carries the same five bars. Read down the class instead of across one instrument, the question changes: is this a shelf of things that fail the same way, or a shelf of things that only share a department?

Which of the five decides what, across these 10

Counted from the same table each product page prints, so the two cannot disagree. Not a rating and not a ranking: it says which failure mode drives the outcome, not how dangerous anything is.

• Market2 of 10The price of the thing moves.Decides: Building Society Savings Contract, Treasury Bill. Matters on 7 more.
• Credit5 of 10Somebody who owes you does not pay.Decides: Certificate of Deposit, Commercial Paper, Savings Deposit, Structured Deposit, Trade Finance. Matters on 5 more.
• Liquidity2 of 10You cannot get out at anything near the marked price.Decides: Commercial Paper, Money Market Fund. Matters on 5 more.
• Funding1 of 10Cash is needed before the position pays off — margin, calls, rolls.Decides: Repo.
• Operational3 of 10The failure is in documents, systems, keys or people, not in prices.Decides: Repo, Securities Lending, Trade Finance. Matters on 4 more.

No single family decides even half of the 10; credit leads with 5 — so two things on this shelf can look alike and break for unrelated reasons. Funding decides exactly one of them, Repo, which is the reason to read that page rather than assume it behaves like its neighbours.

The same five read across all 129 instruments →

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

Interactive: nominal rate → effective yield (APY)Easy

"4% compounded monthly" and "4% compounded annually" are different offers. Compounding frequency turns a nominal rate into the yield you actually earn.

Nominal rate % p.a. Compounding periods / year

Effective yield (APY)

—

If compounded daily

—

Continuous limit

—

Extra on $1,000 / year

—

APY = (1 + n/m)^m − 1. The gap between nominal and effective is small at today's rates and was the entire marketing industry of banking's small print for decades.

How this market works

Analysis

Market mapWho is on the other side of your trade

Prices are made by participants with different jobs, different constraints and different reasons to trade. Knowing whose need you are meeting explains more about a market than any indicator.

• Money market funds are the largest cash pools and the most rule-bound. What they may buy is set by regulation, so their demand is a legal fact rather than a preference.
• Bank treasuries fund the balance sheet daily and are the marginal borrower — their bid sets the rate when reserves are scarce.
• Central banks define the corridor and, through standing facilities, decide whether a rate spike is possible at all.
• Hedge funds finance positions through repo, which makes them the largest source of demand for leverage and the first to be cut in stress.
• Corporates park operating cash and are the least sophisticated and largest single group — which is why the deposit franchise is so valuable.

Costly mistakesThe five mistakes that cost the most here

Not a list of ways to be clever — a list of the errors that recur, why each one is structural rather than careless, and which tool on this site settles it.

• Treating cash as riskless. It is nominally safe and, at any inflation rate, a certain loss of purchasing power. The risk moved, it did not disappear.
• Missing the deposit insurance limit. Cover is per institution, not per brand or account — the coverage tool settles it in seconds.
• Comparing quoted rates with different compounding. Convert everything to an effective annual rate first; the converter takes one line.
• Assuming a money market fund is a deposit. It is a fund with a market-linked value and no guarantee, however stable the price looks.
• Chasing the top of a rate table. The highest advertised rate is frequently an introductory one on a new account, funded by the back book everyone else is on.

What an interview asks here

Money market questions test whether you know that the safest instruments carry the sharpest plumbing risk, and that funding is where crises actually start.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1What is a repo, in one sentence and then properly?

What it is checking. The instrument that funds most of the bond market, and the answer must reach 'legally a sale'.

A complete answer contains:

• A sale of a security with an agreement to buy it back at a set price on a set date — economically a secured loan.
• The difference between the two prices is the interest, expressed as the repo rate.
• It is legally a sale, which is what makes the lender's position robust in an insolvency: it owns the collateral rather than holding a claim over it.
• The haircut is the lender's protection against the collateral's price moving, and it is the number that changes in a crisis.
• A rise in haircuts is a funding contraction that no interest rate shows, which is how a repo market tightens without a rate move.

Read it properly: Repo · Money markets

Q2Why is a money market fund not the same as a bank deposit?

What it is checking. A structure question with real consequences, and the candidate should reach the run dynamic.

A complete answer contains:

• A deposit is a claim on a bank, covered by deposit insurance up to a limit and backed by a supervised balance sheet.
• A fund is a share in a portfolio: you own a slice of the assets, and there is no guarantee of par.
• Which means it can fall below par, and the possibility of that is enough to cause a run even when the assets are sound.
• Redemption gates and liquidity fees were introduced after 2008 precisely to interrupt that dynamic — and they can themselves prompt an early exit.
• So the two look identical to a holder and are structurally different in exactly the moment it matters.

Read it properly: Money market fund · When a fund stops withdrawals

Q3How does a treasury bill's discount yield differ from its true return?

What it is checking. A convention question that catches almost everybody once.

A complete answer contains:

• A bill is quoted at a discount to par, and the discount rate is calculated on par with a 360-day year.
• That understates the actual return, because the investment is the price paid, not par.
• The bond-equivalent yield divides by the price and uses 365 days, which makes it comparable with a coupon bond.
• The effective annual yield compounds it, which is higher again.
• Three numbers for one instrument, and knowing which one you are being quoted is the whole point.

Read it properly: Treasury bill · The bill calculator

Q4What is the difference between secured and unsecured money market rates?

What it is checking. A benchmark question that has become structural since the reforms.

A complete answer contains:

• An unsecured rate is what banks pay to borrow without collateral, so it contains bank credit risk.
• A secured rate is a repo rate, backed by collateral, so it is close to risk-free and reflects collateral scarcity instead.
• The spread between them is a credit-stress gauge, and it widens sharply before anything else does.
• The new benchmarks are largely secured or near-risk-free, which is why a borrower now pays an explicit credit spread on top.
• And a secured rate can spike for a purely technical reason — a shortage of a specific collateral — with no credit content at all.

Read it properly: Repo · Monetary policy

Q5A bank fails over a weekend. Which of its funding disappeared first?

What it is checking. A sequencing question, and it is really about who can leave fastest.

A complete answer contains:

• Uninsured wholesale deposits and overnight unsecured funding, because they reprice or disappear daily and have no protection.
• Then repo counterparties, who raise haircuts and shorten tenors rather than refusing outright.
• Insured retail deposits are stickiest, though digital banking has made even those move faster than the historic assumption.
• Long-term debt cannot leave at all, which is why it is the layer regulators require for resolution.
• The 2023 failures showed the timescale had compressed to hours rather than days, which the rules had not assumed.

Read it properly: SVB, 2023 · Certificate of deposit

Q6What is collateral transformation and why should anybody worry about it?

What it is checking. A plumbing question that connects money markets to derivatives.

A complete answer contains:

• Swapping lower-quality collateral for higher-quality collateral, usually to meet a margin requirement that only accepts the latter.
• It is useful because a pension fund holds assets that are not eligible margin and owes margin in cash or government bonds.
• The risk is that it is a chain: each leg is short-dated and can be withdrawn, so the chain shortens exactly when it is needed.
• It also creates interconnection that is not visible in any single institution's balance sheet.
• Which is precisely what turned a rate move into a liquidity spiral in 2022.

Read it properly: Margin and collateral · The LDI crisis, 2022

Q7Why did central banks start paying interest on reserves?

What it is checking. A policy-mechanics question, and it explains how a floor system works.

A complete answer contains:

• In a scarce-reserve system, the policy rate was set by managing the quantity of reserves.
• After large-scale asset purchases, reserves were abundant, so quantity no longer set the price.
• Paying interest on reserves puts a floor under the money market rate: no bank lends below what it earns risk-free at the central bank.
• That decouples the size of the balance sheet from the level of rates, which is what allows both to be set independently.
• The consequence for a money market is that the policy rate is now an administered floor rather than an outcome.

Read it properly: Monetary policy · Money markets

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

Test yourself: five questions

Five quick questions on this asset class — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations; the deep dives above hold every answer. For education only.

⬇ The whole class on one printable page

Who pays whom, drawn

The payoff charts on this site say what an instrument is worth at the end. These say who the parties are and what each one hands over — every payment between the investor and the bank on the other side, in the order it happens. Each diagram sits on its product's own page. 2 of them carry a second diagram, folded shut, for what happens after the bargain is struck — clearing, delivery, custody. That half is deliberately separate: a clearing house is not a party to the bargain.

• Savings Deposit — Your deposit is the bank's money, and you are its creditor
• Money Market Fund — Why redeeming first can be worth something
• Building Society Savings Contract — Two contracts in sequence, agreed at once
• Repo — A loan that is legally a sale
• Securities Lending — What you are paid, and what you give up while it is lent
• Structured Deposit — A deposit and an option, sold as one thing
• Trade Finance — Who is actually promising to pay the exporter

Who does this: Money Markets is quoted from five sell-side seats — Sales, Trading, Structuring, Research, Prime Services — and held from the buy-side by Asset Management, Private Markets, Hedge Funds & Alternatives, Wealth Management, Insurance & Pensions. See the industry map.