Glut of dollars pushes use of Fed’s reverse repo function to save

Demand for a key Federal Reserve facility used to help control short-term rates has reached its highest level on record, 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 surpassed the previous record volume of $ 474.6 billion as of Dec.31, 2015, according to data from the Fed Bank of New York, and was an increase from $ 450 billion on Wednesday.

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 partly the result of central bank asset purchases and drawdowns from the treasury cash account, pushing reserves into the system. Recent stimulus payments to states and local governments are adding more liquidity to the front-end, 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 the 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 counter it are seen by most as the main drivers of this discussion. But the upheavals taking place in short-term bond markets are also increasingly the focus of market watchers’ concerns, although many doubt this is an issue that will significantly change the Fed’s stance. .

The liquidity tsunami sent yields on short-term securities from repurchase agreements to treasury bills near or below zero. General overnight 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 three-month Libor in dollars. continues to set new record 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 the interest rate strategy in the United States at Société Générale. .

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