Repo, Carry, and the Funding Leg of Fixed Income

Every long position in a fixed-income security must be financed. A bond trader who buys a 10-year Treasury does not pay cash upfront — they finance the purchase in the repurchase agreement (repo) market: they sell the bond today and agree to buy it back tomorrow (or at a term) at a slightly higher price. The difference in price is the repo interest. The repo market is the plumbing of fixed-income finance: it sets the marginal funding cost for bond positions, creates the concept of carry (the net income from holding a bond after financing costs), and generates the on-the-run premium that makes newly auctioned bonds trade at lower yields than older bonds of similar maturity. Understanding repo is prerequisite to understanding futures (which embed the carry implicitly), forwards, and the basis between cash and derivative markets.