Fed Reverse Repo Usage Shows No Sign of Slowing Amid Imbalances
(Bloomberg) -- The glut of cash in U.S. interest-rate markets pushed the amount of money that investors are parking at a major central bank facility to yet another all-time high.
Eighty-two participants on Tuesday placed $1.19 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. That surpassed the previous record volume of $1.147 trillion from Aug. 25, New York Fed data show.
While usage is expected to recede on Wednesday since its the beginning of a new month, demand will eventually move higher as the deluge shows few signs of slowing.
The Fed’s ongoing asset purchases and Treasury’s drawdown of its cash balance are pushing more reserves into the system, causing liquidity to swell. These growing imbalances in front end markets have helped keep downward pressure on short-end rates, raising the likelihood that RRP usage will rise further.
“It probably goes higher,” said Subadra Rajappa, head of U.S. interest rates strategy at Societe Generale. These drivers are “the reduction in front-end supply, the cash glut from rising reserves, inflows into ultra-short bond funds.”
In anticipation of the cash surge distorting funding markets, Federal Reserve policy makers this year have taken a series of steps to increase the capacity of the RRP, including boosting its per counterparty limits to $80 billion each, and adjusting the criteria to make the facility more accessible to more money funds. It even raised its administered rates at its June gathering by 5 basis points to help support the smooth functioning of short-term funding markets.
Lorie Logan, manager of the System Open Market Account at the New York Fed, noted in the minutes of the July 27-28 meeting that it may become appropriate to lift the RRP counterparty limit from $80 billion if a number of users reached their threshold.
Yet it remains uncertain as to where demand for the Fed’s facility will peak. Rajappa said it will depend on the timing of the U.S. government’s resolution of the debt ceiling, which the Treasury bill market is currently pricing for October or November. After that, Treasury can increase its supply, providing another investment alternative for investors.
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