Band Gertrude Chavez-Dreyfuss
NEW YORK, July 2 (Reuters) – The US debt ceiling came back into effect at the end of July, putting pressure on the Treasury to reduce its cash flow before maturity. This means more injections of liquidity into a financial system that is already overflowing with liquidity, potentially lowering short-term rates and causing undue distortion of money markets.
Nearly a record $ 1 trillion in cash poured into the Federal Reserve’s Reverse Repurchase Facility (RRP) on Wednesday.
On Thursday and Friday, reverse repo volumes reached $ 742.6 billion and $ 731.5 billion, respectively.
The record volume came after the Fed last month made a technical adjustment to the interest rates it manages, breeding the rate paid by banks on excess reserves (IOER) held at the Fed at 0.15% against 0.10% and lifting the rate paid on reverse repo to 0.05% from zero.
WHAT IS THE FED REPO REPO WINDOW?
The Fed launched its reverse repo program (RRP) in 2013 to mop up additional liquidity in the repo market and create a hard floor below its policy rate, or the effective federal funds rate, currently in a target range of 0% to 0.25%. Eligible counterparties lend liquidity to the Fed in exchange for overnight Treasury guarantees.
WHAT IS THE RELATIONSHIP BETWEEN THE CASH VOLUME AND THE DEBT CEILING?
The market is facing excess liquidity in the banking system due to the Fed’s asset purchases as part of quantitative easing and the US Treasury’s financial support to the economy in response to the pandemic.
The US Treasury must reduce its cash balance in the General Treasury Account (TGA) deposited with the Fed to a target of $ 450 billion before a two-year debt ceiling suspension expires on July 31. As of June 29, the Treasury had a cash balance of $ 711 billion, according to Wrightson ICAP data.
A reduction in the TGA increases the reserves of the banking system, which are now paid into the RRP market.
IS REPO REPO VOLUME GROWTH A CONCERN?
Rising RRP rates could reduce demand by money market funds for US Treasuries, as the rates for the latter are at their lowest. For example, 3-month U.S. Treasury bill rates US3MT = RR currently hover below 0.05%.
Zoltan Pozsar, global head of short-term interest rate strategy at Credit Suisse, said the rotation of invoices to RRPs will not happen quickly because invoices are currently underwater, which means they are underwater. can only be sold at a loss.
“But it will happen that it will,” he said.
Investors are also watching whether the amount of reserves and deposits that banks could lose to the RRP facility could be large enough to disrupt the dynamics of the interest rate market.
Lou Crandall, chief economist at Wrightson, believes bank cash outflows are not yet a problem.
If banks are worried about seeing excessive cash outflows because money market funds can earn 0.05% with the RRP facility, they can match that rate to hold their deposits, he said.
US Treasury cash balancehttps://tmsnrt.rs/3gnDcYi
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Andrea Ricci)
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