A facility that allows money market funds and banks to park their money in the Federal Reserve was tapped into record size Thursday, underscoring the lack of options for investors given the collapse in yields on securities. ultra secure and short-term that you typically invest in.
About 50 participants contributed $ 485.3 billion to the U.S. central bank through its reverse repurchase (RRP) program. according to the data from the New York branch of the Fed. The figure eclipsed the record $ 474.6 billion escaped from the system on New Year’s Eve 2015 and marked an increase of more than $ 400 billion placed here overnight on both Tuesday and Wednesday. of this week.
The demand has raised for ease in recent months such as yields on Treasury bills – which mature in a year or less – and the rate at which investors exchange high-quality guarantees such as Treasuries for the number in the repo markets have fallen below zero. The RRP pays 0 percent interest on the number deposited overnight.
“The growth in demand for the Fed’s RRP operations has been incredible,” said John Canavan, an analyst at Oxford Economics. “It’s not over yet.”
At the crucial point of the problem is a cash-flooded financial system with few feasible places in the short term to park it. The Fed’s so-called RRP has become the market’s “relief valve,” according to Canavan, giving investors an alternative place to keep.
Excess reserves in the banking system have grown since the beginning of the year in part due to the Fed’s $ 120 billion acquisition of Treasury and securities backed by the agency each month, along with the federal government that distribute stimulus controls to aid pandemic recovery. Money market funds have attracted income as banks try to change it deposits in such funds for regulatory reasons.
Complicating the situation, the supply of short-term debt is declining at the same time as demand is increasing, in part because the Treasury has reduced the stock of bills in favor of issuing longer-term debt.
Joseph Abate, money market strategist at Barclays, said the facility functions as intended to absorb the extra money into the system at a time when Treasury bills with a maturity of less than a month are traded with negative returns.
Some U.S. government short-term debts were cited at yields of less than 0.01 or less than 0.02 percentage points Thursday.
“Large balance sheets in the RRP indicate that while rates in the invoice and repo market are set at zero, the RRP is effectively wiping out excess liquidity and keeping exchange rates below zero,” he said. said.
Investors are keeping a particularly close eye on the federal funds rate, the Fed’s main policy rate, which has fallen along with other short-term rates and is now well below mid-range 0. -0.25 percent of the central bank. It was quoted at 0.06 percent Thursday.
Market participants speculate a move to 0.05 per cent could prompt further action by the central bank.
The Fed has signaled that it is open to raising the RRP rate or the interest it pays banks on the reserves they hold in the central bank to ensure the rate of fed funds does not drift even lower.
“The Fed’s role in the money markets is only growing,” said Priya Misra, global head of TD Securities ’rate strategy. “It’s clear the market isn’t working alone.”