The New York Fed announced that a total of 90 counterparties deposited $991.9 billion in the Fed’s overnight fixed-rate reverse repo instruments on Wednesday, June 30, EDT, an increase of $150.7 billion, or nearly 18 percent, from yesterday.
This represents another record high for Fed overnight reverse rep usage, surpassing the record set on Tuesday of $841.2 billion. This is not only the 10th consecutive trading day over $700 billion and the third consecutive trading day over $800 billion, but also a move toward the key psychological round number of $1 trillion.
Meanwhile, the number of 90 counterparties today was the largest since 2016, and the increase in reverse repo volume was the largest in two weeks since June 17 of this year. The number of counterparties on Tuesday was 74, representing a jump of more than 20% (21.6%) in one day for institutions such as money market funds that need to deposit excess liquidity with the Federal Reserve.
Financial blog Zerohedge said that the current quarter-end, due to compliance requirements for balance sheet adjustments, as well as some dealers therefore curtailed funding market activity, making it possible to accept less idle cash, have led to the Fed’s reverse repo dosage “customary” spike. Therefore, today’s data may be an outlier, but reverse repos exceeding trillions of dollars may soon become the “new normal”.
The Wall Street Journal article has described how, in contrast to the Chinese central bank’s open market operations, the Fed releases liquidity through positive repo and recovers liquidity through reverse repo. Overnight reverse repo has the function of liquidity recovery, where qualified counterparties such as money market funds and banks deposit cash with the Fed in exchange for high-quality collateral such as U.S. Treasuries.
Previously, the interest rate ON RRP, which moves the overnight reverse repo instrument, attracted a large amount of funds despite being only zero. This means that funds chasing short-term yields simply have nowhere to go but into the Fed without interest. At the same time, the ON RRP rate acts as a floor for the Fed’s policy rate, the federal funds rate corridor, and this burst of reverse repo instrument usage could force key short-term rates to turn negative.
Two weeks ago on June 16, the Fed’s FOMC announced a 5 basis point increase in both the excess reserve rate (IOER), which serves as the upper limit of the federal funds rate range, and the overnight reverse repo rate (ON RRP), which serves as the lower limit, raising the ON RRP to 0.05%.
The day after that, on Thursday (June 17), the Fed’s reverse repo tool usage surged by $253.1 billion, a one-day increase of up to 45%, with the total usage rising directly from $502.9 billion on the day the FOMC announced its resolution to $756 billion, breaking the $700 billion barrier in one fell swoop. Since then, the reverse repo usage has been hitting new highs, and has stood steady above $700 billion since June 17.
Wall Street News has mentioned that after the Fed raised IOER and ON RRP, Wall Street institutions expected that the usage of overnight reverse repo instruments would continue to increase, and the risk-free return created by overnight reverse repo instruments now exceeds that of many short-term U.S. Treasuries.
JPMorgan believes that despite the Fed’s move to ease downward pressure on short rates, the supply-demand imbalance remains, “and is likely to continue to intensify over the medium term”.
UBS analysts expect that the Fed’s managed rate adjustment may allow further elevated use of reverse repo instruments, with some of the increase coming from government-sponsored enterprises (GSEs), as GSEs can now receive a higher yield than the previous existence of the Fed’s zero interest rate.