Fed Reverse Repo Usage Hits Record High After Tweak to Limits

(Bloomberg) -- The amount of money that investors are parking at a major central bank facility climbed to yet another all-time high as policy makers expanded the limit for counterparties and signaled asset purchase tapering is imminent. 

Seventy-seven participants on Wednesday placed a total of $1.352 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 $1.28 trillion from Wednesday, New York Fed data show.

Demand for the so-called RRP has climbed further after the Fed this week boosted the amount that each counterparty can potentially place at the facility to $160 billion from $80 billion. Overall volume had been rising all week as a flood of cash continues to overwhelm the U.S. dollar funding markets due to central-bank asset purchases and the drawdown of the Treasury’s cash account, which is pushing reserves into the system.

“With more bill paydowns, no alternatives, and a higher limit, there is just nowhere else for the cash to go,” said TD Securities strategist Gennadiy Goldberg. 

The larger limit will continue to support the funding markets even as the Fed begins tapering its asset-purchase program because the supply-demand imbalances in short-end securities are likely to persist. 

Assuming a mid-2022 end to asset purchases means the central bank will still be adding more than $400 billion of liquidity into the financial system, according to JPMorgan Securities strategists. 

The debt ceiling situation is also fueling pressure, but even if that is resolved quickly, pressure from bill supply imbalances could continue.

“The cash glut in the liquidity markets is not going away anytime soon, and downward pressures on money market rates should persist over the next 6-12 months,” JPMorgan strategists Teresa Ho and Alex Roever wrote in a note Thursday before the RRP results. “Suddenly, $1.5 trillon of RRP usage doesn’t appear unreachable.” 

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