Clarification: How extra liquidity happens in cash markets and reverse repurchase agreements in america

An eagle looms over the facade of the US Federal Reserve constructing in Washington on July 31, 2013. REUTERS / Jonathan Ernst

NEW YORK, July 2 (Reuters) – The US debt ceiling returns to impact on the finish of July, placing strain on the Treasury to cut back its money stream forward of the deadline. This implies extra injections of liquidity right into a monetary system that’s already overflowing with liquidity, which may decrease short-term charges and trigger undue distortion of cash markets.

Practically a report trillion {dollars} in money poured into the Federal Reserve’s reverse repurchase facility (RRP) on Wednesday.

On Thursday and Friday, reverse repo volumes peaked at $ 742.6 billion and $ 731.5 billion, respectively.

The report quantity got here after the Fed final month made a technical adjustment to the rates of interest it manages, elevating the speed paid by banks on extra reserves (IOER) held on the Fed to 0, 15% in opposition to 0.10% and by carrying the speed paid on the catches 0.05% from zero.


The Fed launched its reverse repo program (RRP) in 2013 to mop up extra liquidity within the repo market and create a tough ground beneath its coverage fee, or the efficient federal funds fee, at present in a goal vary of 0% to 0.25%. Eligible counterparties lend liquidity to the Fed in trade for in a single day Treasury ensures.


The market is going through extra liquidity within the banking system because of the Fed’s asset purchases as a part of quantitative easing and the US Treasury’s monetary assist to the financial system in response to the pandemic.

The US Treasury should cut back its money stability within the Normal Treasury Account (TGA) deposited with the Fed to a goal of $ 450 billion earlier than a two-year debt ceiling suspension expires on July 31. learn extra As of June 29, the Treasury has a money stability of $ 711 billion, based on Wrightson ICAP knowledge.

A discount within the TGA will increase the reserves of the banking system, which at the moment are paid into the RRP market.


Elevating RRP charges may cut back the demand of cash market funds for US Treasuries, because the charges for the latter are at their lowest. For instance, 3-month US Treasury invoice charges are at present hovering beneath 0.05%.

Zoltan Pozsar, international head of short-term rate of interest technique at Credit score Suisse, mentioned the rotation of invoices to RRPs is not going to occur shortly as a result of invoices are at present underwater, which implies they’re underwater. can solely be bought at a loss.

“However will it occur,” he mentioned.

Buyers are additionally watching whether or not the quantity of reserves and deposits that banks may lose to the RRP facility might be giant sufficient to disrupt the dynamics of the rate of interest market.

Lou Crandall, chief economist at Wrightson, believes financial institution money outflows should not but an issue.

If banks are apprehensive about seeing extreme money outflows as a result of cash market funds can earn 0.05% with the RRP facility, they will match that fee to carry their deposits, he mentioned.

Reporting by Gertrude Chavez-Dreyfuss; Modifying by Alden Bentley and Andrea Ricci

Our requirements: Thomson Reuters Belief Ideas.

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