As the “recession trade” prevails on Wall Street, fund managers are struggling to find a safe haven for short-term money.

Data showed that the Fed’s reverse repurchase facility used more than $2 trillion for the first time on Monday, reaching $2.045 trillion. The previous record was $1.988 trillion set on Friday. This underscores a surge in investor demand for safe-haven investments as interest rates rise and financial markets fluctuate, market analysts said.

Many investors will wonder, what is the Fed’s overnight reverse repurchase facility? What does this surge in data mean? What will be the impact?

What is the Fed’s overnight reverse repo facility?

Positive repurchase and reverse repo are two means of the Fed’s open market operations, and the base currency is directly released or withdrawn through an agreement with the counterparty. Contrary to the central bank’s open market operations, the Fed is repurchasing to release liquidity and reverse repo to recover liquidity.

The Fed’s overnight reverse repurchase has the function of withdrawing liquidity. Institutional investors such as money market funds and banks deposit cash into the Fed, and then exchange for high-quality collateral such as U.S. Treasury bonds. The term is only one day. Simply put, buy Treasury bonds today. Wait for the collateral, reduce the cash, and sell it tomorrow to get the cash back. In addition, the overnight reverse repo rate effectively acts as a lower bound on the federal funds rate corridor.

After the subprime mortgage crisis, the overnight reverse repurchase (ON RRP) replaced the positive repo and the Fed became an important tool for controlling short-term interest rates.

What does the surge in reverse repurchase mean? What will be the impact?

According to the view of Renfu Finance, the Fed’s reverse repurchase hit a new record high when U.S. stocks rebounded and U.S. bond yields fell. One shows that there is an asset shortage in the U.S. market, and capital flocks to the currency market to avoid safety; the other shows that the U.S. There is a serious excess of market liquidity, and the phenomenon of currency idling in the financial market is serious; these three indicate that the high inflation in the United States is still difficult to control.

Faced with the prospect of rapidly rising interest rates, investors are keeping their holdings as short as possible to maturity so that they can allocate cash more flexibly if rates rise faster than expected in the coming months.

In addition, the Fed is expected to begin shrinking its massive balance sheet next month, when it will stop reinvesting all maturing securities in its portfolio, fueling enthusiasm for investors to use the Fed’s overnight reverse repo facility.

Market analysis shows that although the Federal Reserve has raised interest rates twice in March and May this year, and hinted that it will continue to raise interest rates aggressively , there are few other attractive options for fund companies and banks to use for storage. excess cash, so they see Fed reverse repos as a safe haven.

According to the New York Fed’s introduction, the overnight reverse repo facility will not change the size of the Fed’s balance sheet, but it will change the composition of the Fed’s liabilities.

For example, when money market funds reduce their deposits with banks and move those funds into overnight reverse repos, it reduces the balance of reserves banks hold at the Fed. As a result, the use of the overnight reverse repo facility spreads the Fed’s liabilities more broadly among various money market participants.

Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, said:

The U.S. Treasury is still reducing the supply of Treasury bills, which seems to be pushing the market firmly into the arms of reverse repos, making it the only safe haven in the market. The main effect of the market pushing up the amount of reverse repo is that quantitative tightening is expected to quickly drain reserves from the system when the Fed begins to shrink its balance sheet, given that reverse repo usage remains high.

This article is reprinted from: https://news.futunn.com/post/15815861?src=3&report_type=market&report_id=206496&futusource=news_headline_list
This site is for inclusion only, and the copyright belongs to the original author.