Trillions of dollars are pouring into the Federal Reserve, which is designed to clean out the financial system’s excess cash every day, leaving many of the safest investment funds unsafe despite rising interest rates. It shows that it is avoiding the stable US government debt market.
Investors deposited an average of $2.2 trillion a day into the Fed’s reverse repo facility this month. At this facility, an investor can get a set rate of parking his fund overnight. This is down from his $2.6 trillion record on the last trading day of 2022, but above his $2 trillion average last year. Prior to March 2021, usage was typically just a few billion dollars per day.
The frequent use of the Fed’s reverse repo facility in recent months has baffled central bank officials and private sector analysts. They say that as money market funds offer higher yields and central banks shrink their balance sheets, there is still plenty of government bonds left on the market for investors to buy.
The U.S. government’s money market funds, which manage approximately $4 trillion in assets, hold short-term Treasury bills, known as “notes,” or hold cash in other ultra-secure instruments such as the Federal Reserve. Trying to keep prices down. High volatility in the Treasury bill market, caused by periodic swings in Fed monetary policy expectations, is predictable in addition to being a risk-free investment. increasing the attractiveness of depositing cash with central banks that offer reasonable levels of returns. .
“[Reverse repo] Peter Crane, president of Crane Data, which specializes in money market funds, said: “No one wants to buy more than one day in case the Fed changes policy, in case they are wrong.”
Fed officials thought the unwinding of central bank balance sheets that began last summer would reduce the use of reverse repos. is used to buy government bonds, ultimately reducing the amount held in the facility. But that trend has yet to materialize.
“I would have expected the balance sheet outflow to have a bigger impact and the market needing cash. [reverse repo] To fund securities coming into the market from the run-off of the balance sheet. But the market doesn’t really need that much cash,” said Scott Skyme, repo market specialist at Curvature Securities.
The Treasury Department is also helping to facilitate reverse repos by reducing the use of short-term borrowing through notes that mature in as little as a few days and as long as a year.
Washington’s aim was to lower the interest burden by extending the average repayment schedule, but the change made it buy less money market funds and other short-term safe assets. 4.3 percent offered by RRP.
“If we had kept our assets last year, it might not have been such a big deal, but we had an over-allocation to cash to avoid what was happening in the stock and bond markets, so there was a shortfall. Short-term Treasury rates are well below market floor reverse repo rates,” said Deborah, chief investment officer for global liquidity markets at Federated Hermes, a leading money market fund manager. Cunningham said.
Another reason for the increased use of reverse repos, analysts say, is that many investors who don’t have direct access to reverse repo facilities deposit their surplus funds in money market funds rather than bank-provided savings accounts. still love it.
If banks start offering higher interest rates on savings accounts, reverse repo usage could actually decline this year. JP Morgan recently warned it could raise deposit rates soon, but still-low bank rates have yet to pull savers away from higher-yielding, lower-risk money market offerings.
“At some point, I think banks will probably start offering more deposits, but we’re not there yet,” said Tom Simmons, money market economist at Jefferies.