What is money market
The money market is where banks, companies and governments borrow and lend money for short periods, usually up to a year.
Formally, it is the market for debt instruments with an original maturity of a year or less. These instruments are highly liquid and close to cash. Prices move with short-term interest rates, which the central bank steers through its policy rate.
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A worked example
This case is hypothetical.
A bank ends the day with more cash than it needs. Another bank is short of cash and must meet its reserve requirement. The first bank lends to the second overnight in the interbank market. The next day the borrower repays the loan plus interest at the agreed overnight rate.
A treasury bill works in a similar way. The government sells the bill below its face value. At maturity it repays the full face value. The difference between the purchase price and the face value is the buyer's return. Unlike a coupon bond, the bill pays no interest during its life.
Money market instruments
| Instrument | Issuer or user | Note |
|---|---|---|
| Treasury bills | Government | Sold at a discount through a bond auction |
| Interbank call money | Banks | Often overnight, usually unsecured |
| Repurchase agreements (repo) | Banks, central bank | Loan backed by securities as collateral |
| Commercial paper | Large companies | Unsecured, so it depends on the issuer's credit |
| Certificates of deposit | Banks | Fixed term deposit that can be traded |
Islamic banks use Shariah-compliant short-term instruments instead of interest-based loans. See Islamic finance.
Money market funds
Money market funds pool investors' money and buy short-term instruments such as treasury bills and bank placements. They aim for low volatility and quick access to cash.
A money market fund is not a bank deposit. Its value can fall if an issuer defaults or if many investors withdraw at once. For how fund structures differ, see open-end vs closed-end fund. For saving products in general, see Saving, Investing, Loans.
Where the term appears
- Central bank news. The State Bank of Pakistan sets the policy rate and an interest rate corridor that anchor money market rates. Example of a decision: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Rate changes are often quoted in basis points.
- Bank and loan reports. Interbank offered rates such as KIBOR, used to price many loans in Pakistan, come from the money market.
- Trading platforms. Overnight swap fees on forex positions reflect the short-term interest rate gap between the two currencies. This gap also drives forward points and covered interest parity. Leveraged forex and CFD trading can lose money fast, and swaps add to the cost of holding a position.
Edge cases for experienced readers
- Original vs remaining maturity. A long-term bond with a few months left to maturity behaves like a money market instrument, but it is not one by the formal definition.
- Secured vs unsecured. Repo rates can differ from unsecured interbank rates. The gap widens when counterparty risk rises.
- Stress. In a credit crunch or a bank run, money market lending can stop quickly. When that happens, central banks lend directly to banks.
More terms: Trading glossary and Fundamental analysis.
Frequent questions
What is money market in simple words?
It is short-term borrowing and lending of money, usually for a year or less, between banks, companies and governments.
What are the main money market instruments?
Treasury bills, interbank call money, repos, commercial paper and certificates of deposit.
Are money market funds risk-free?
No. They aim for low risk, but their value can fall, and they are not bank deposits.
How is the money market linked to the policy rate?
The central bank's policy rate and corridor guide the rates at which banks lend to each other for short periods.
Why does it matter to forex traders?
Short-term interest rate differences affect swap charges and forward prices on currency pairs.