The institution that allows money market funds and banks to deposit their cash in the Federal Reserve hit a record high on Thursday, highlighting the lack of options for investors, given the decline in the risky, short-term securities yields that usually invest
About 50 participants raised $ 485.3 billion at the US Federal Reserve through its RRP program. according to the data From the Fed New York branch. This figure surpassed the record $ 474.6 billion leaked from the system on New Year’s Eve 2015, an increase of more than $ 400 billion, which was placed there overnight both this Tuesday and Wednesday.
It has a demand rose In recent months, the yield on treasury bonds maturing in a year or less, and the interest rate at which investors exchange high-quality cash collateral in repo markets, such as Treasuries, is below zero. RRP pays 0% interest rate on overnight cash deposit.
“The huge increase in demand for Fed RRP operations has been incredible,” said Oxford Economics analyst John von Kanavan. “It’s not over yet.”
At the heart of the problem is a cash-strapped financial system with a few viable short-term locations to make it. According to Kanavan, the Fed’s so-called RRP object has become the “relief valve” of the market, giving investors an alternative storage space.
Excess reserves in the banking system have risen since the beginning of the year, in part due to the Fed’s $ 120 billion-a-month treasury-to-agency mortgage-backed securities, as the federal government conducts stimulus inspections to help recover from the epidemic. Money market funds as banks have attracted cash flows try to shift Deposits for such arrangements.
Complicating the situation, short-term debt supply has been reduced in line with growing demand, in part because the Treasury has reduced the banknote fund in favor of issuing longer-term debt.
Joseph Abate, Barclays’ money market strategist, said the agency was working to absorb additional cash into the system when less than a month’s worth of treasury bonds were selling at a negative yield.
Some short-term US government debt on Thursday was yielded at a yield of minus 0.01 or minus 0.02 percentage points.
“RRP large balances show that while interest rates in the accounts repo market are zero, RRP is effectively distorting excess liquidity, keeping rates below zero,” he said.
Investors are paying close attention to the federal funds rate, the Fed’s key policy rate, which has fallen, along with other short-term interest rates, and is now below the central bank’s target range of 0-0.25 percent. It was quoted at 0.06% on Thursday.
Market participants speculate that a 0.05% shift could trigger further action by the central bank.
The Fed has announced that it is open to raising the RRP interest rate or interest rate it pays to banks on the reserves they hold with the central bank to ensure that interest rates on funded funds are further reduced.
“The Fed’s role in the money markets is only growing,” said Priya Misra, TD Securities’ global interest rate leader. “Obviously, the market does not operate on its own.”