Glut of dollars pushes use of Fed reverse repo facility to save

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Demand for a key Federal Reserve facility used to help control short-term rates hit an all-time high, welcoming a barrage of cash seeking housing.

Fifty participants parked a total of $ 485.3 billion on Thursday on the overnight repo facility, in which counterparties like money market funds can place liquidity with the central bank. That topped the previous record high of $ 474.6 billion as of Dec.31, 2015, according to data from the Fed Bank of New York, and was an increase from Wednesday’s $ 450 billion.

Even though the offer rate on the Fed’s facility is 0 percent, demand has increased as a flood of liquidity overwhelms US dollar funding markets. This is in part the result of the central bank’s asset purchases and drawdowns from the treasury’s cash account, which push reserves into the system. Recent stimulus payments to state and local governments add more liquidity up front, while regulatory constraints are also causing banks to refuse deposits and direct that liquidity to money market funds.

The massive build-up of dollars in the funding market is also fueling debate over when and how quickly the Federal Reserve should begin to slow the pace of asset purchases it undertakes. The prospects for a sustained acceleration in inflation and the need to potentially lean against it are seen by most as the main drivers of this discussion. But the upheavals taking place in the short-term fixed income markets are also increasingly at the center of the concerns of market watchers, although many doubt that this is an issue that will significantly alter the situation. the Fed’s position.

The liquidity tsunami sent yields on short-term securities from repurchase agreements to treasury bills near or below zero. Overnight general guarantees opened at minus 0.01% on Thursday, according to Oxford Economics, while the Treasury sold four-week bills at 0% several times over the past month, and the dollar Libor at three months continues to set new all-time lows.

“It is clear that two or three weeks ago the excess reserves hit the inflection point where the system is silent and it all ends up in the Fed’s RRP program,” said Subadra Rajappa, head of US interest rate strategy at Societe Generale. .

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