Demand for the reverse repurchase (RRP) facility of the Federal Reserve declined on Thursday, dipping below $2 trillion for the first time since June 2022. This occurred in the midst of a torrent of Treasury debt issuance as a result of the recent extension of the debt limit for the United States of America.
According to statistics provided by the New York Federal Reserve, the overnight reverse repo window of the Federal Reserve received bids totaling $1.992 trillion at a rate of 5.05%. These bids were given to 103 different bidders. One of the most significant types of players in the market for reverse repos are money market funds.
The Open Market Trading Desk of the New York Fed is the one in charge of handling reverse repos. A reverse repurchase agreement (reverse repo) is a financial transaction in which market players lend funds to the Federal Reserve, often overnight, at an interest rate of 5.05%, in return for Treasuries or other government assets, with the commitment to buy them back later.
The Treasury Department wasted no time in issuing bills to build up its cash account at the Fed after the debt limit was delayed until January 1, 2025 as part of an agreement that was signed by President Joe Biden two weeks ago. The Treasury focused on shorter-tenor benchmark securities and cash management bills (CMBs), which are abbreviated as “CMBs.”
Treasury currently anticipates that its cash position will be close to $425 billion by the end of June, according to advice that was published the previous week. According to Wrightson, a company that specialises in researching the money market, the cash balance of the Treasury as of June 13 was $133 billion.
“The fact that money market funds are moving capital out of the facility and investing it in bill purchases is a very encouraging indicator. According to Gennadiy Goldberg, a senior rates analyst at TD Securities in New York, “I think that in part it is helped by the fact that the Treasury leaned their bill supply towards the shorter end of the curve in order to get out of reverse repos.”
According to the experts, the transition away from reverse repos and towards T-bills was to be anticipated.
Currently, the yield on one-month T-bills is 5.0855% US1MT=RR, while the yield on two-month bills is 5.15% US2MT=RR. Both of these rates are greater than the reverse repo rate. However, these yields also reflect investors’ anticipation of increased interest rates as a result of the Fed’s ongoing policy of monetary tightening.