Dollar Glut Drives Usage of Fed Reverse Repo Facility to Record

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Demand for a key Federal Reserve facility used to help control short-term rates surged to the highest on record, accommodating a barrage of cash in search of a home.

Fifty participants on Thursday parked a total of $485.3 billion at the overnight reverse repurchase facility, in which counterparties like money-market funds can place cash with the central bank. That surpassed the previous record volume of $474.6 billion from Dec. 31, 2015, Fed Bank of New York data show, and was an increase from $450 billion on Wednesday.

Even though the offering rate on the Fed facility is 0%, demand has been increasing as a flood of cash overwhelms U.S. dollar funding markets. That’s in part a result of central-bank asset purchases and drawdowns of the Treasury’s cash account, which is pushing reserves into the system. Recent stimulus payments to state and local governments are adding more cash to the front-end, while regulatory constraints are also spurring banks to turn away deposits and direct that cash to money-market funds.

The massive buildup of dollars in the funding market is also adding fuel to the debate about just when and how quickly the Federal Reserve ought to begin dialing back the pace of asset purchases it is undertaking. The prospects of sustained accelerating inflation and the need to potentially lean against that are seen by most as the key drivers of that discussion. But the dislocations taking place in short-term fixed-income markets are also increasingly coming into focus for market observers, even if many doubt that this as an issue that will move the Fed’s position substantially.

Dollar Glut Drives Usage of Fed Reverse Repo Facility to Record

The tsunami of cash has driven yields on short-term securities from repo agreements to Treasury bills near or below zero. Overnight general collateral opened at minus 0.01% on Thursday, according to Oxford Economics, while the Treasury has sold four-week bills at 0% repeatedly during the past month, and three-month dollar Libor continues to fix at fresh record lows.

“It’s clear that two or three weeks ago that excess reserves reached the inflection point where the system is saying no more and all of this is ending up in the Fed’s RRP program,” said Subadra Rajappa, head of U.S. interest rates strategy at Societe Generale.

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