With the alleviation of the shortage of low-risk assets that can generate positive returns, investors’ demand for a facility of the Federal Reserve surged after a record operation last year. Investors stored cash in the facility overnight, which is expected to be reduce.
In 2021, investors deposited a record amount in the Fed’s overnight reverse repurchase facility, and the cash can be used to exchange U.S. Treasury bonds and other ultra-safe securities. The daily usage of RRP averaged US$1.6 trillion in December and soared to a record US$1.9 trillion on the last day of the year. The average daily usage in December 2020 is zero.
As the last investment method, this tool has attracted such high demand throughout the year. Because of the shortage of safe and short-term Treasury bills, investors such as money market funds have Less safe places Deploy their cash.
But strategists say that by 2022, as the large amount of cash injected into the financial markets to deal with the devastating effects of the pandemic begins to fade, the popularity of RRP will begin to weaken. This will bring more options to investors and may enhance the fate of troubled money market funds that invest in short-term assets.
Mark Cabana, head of U.S. interest rate strategy at Bank of America, said: “We do believe that we are very close to peaking overnight reverse repurchase.” “For monetary funds, this means they finally have other appeals. The choice. The only reason money funds invest in the Fed is that this is their worst choice.”
The reduction in the issuance of Treasury bills in 2021-to support long-term debt-is part of the reason why the use of RRP tools is so high. In addition, the Fed’s large-scale bond purchase program allowed the central bank to inject large amounts of cash into the financial system.
The demand for money market funds, they are one of the biggest buyers Treasury bills, So high that it temporarily pushed the yield of government debt into a negative region.
Stimulus funds related to the various aid programs passed by Congress have also increased the savings rate of Americans, thereby increasing bank deposits. The bank re-implemented stricter capital requirements in March, Start coaching Customers transfer their funds from deposits to currency funds.
But with the passage of new legislation elevator U.S. government Loan limit In December, the Ministry of Finance now expects to rebuild its cash balance and increase the issuance of short-term securities to provide much-needed relief.
Between now and the end of January, Kabbana said that he expects the cash balance of the Ministry of Finance to increase by approximately US$600 billion.
The Fed also Announce It will accelerate the reduction of its asset purchase plan, helping to further alleviate the serious mismatch between the amount of cash to find homes and the amount of securities available for purchase.
Although the RRP data is jaw-dropping, Fed officials have hardly expressed concern about the record use of the tool in 2021. When asked about the seemingly endless need to store cash at the central bank overnight in July, Chairman Jay Powell stated that the facility “does what it should.”
The minutes of subsequent policy meetings also showed that the Federal Open Market Committee has reached a broad consensus that the mechanism is operating as expected.
In order to maintain its effectiveness, the Fed has repeatedly adjusted the terms of the tool. The central bank expanded the number of qualified counterparties that can use RRP and increased the amount of funds they can invest every day-this is the adjustment it made when it recently raised the daily counterparty limit to $160 billion in September.
Also started Pay interest The funds held there overnight in June to support the smooth operation of the short-term financing market. This move was made while deciding to increase the interest on excess reserves, which were deposited by banks in the Federal Reserve.
However, recently, a senior Federal Reserve official cited the rise in RRP utilization as another signal that the central bank should get rid of the ultra-loose monetary policy stance that has been adopted since the beginning of 2019 more quickly. Pandemic.
“It is clear that we can do faster on the balance sheet because I checked the RRP tool and there are about 1.5 tons of reserves handed over to us from the financial sector every day,” said Governor Christopher Waller.In mid-December, he Layout Reasons for the Fed to start shrinking its balance sheet in the summer. “We have invested too much liquidity in the system that the market does not want.”
After a hard year, the benefits of increased bill issuance may have the most significant impact on the $4 trillion money market fund industry. The negative market yields in 2021 wiped out profits and forced funds to reject new investors.
However, some strategists have warned that currency market pressures may reappear later this year. Although the Ministry of Finance plans to auction more bills in the short term, the overall debt issuance volume is expected to decline in 2022 due to the decline in funding requirements for fiscal plans.
“Once the supply of bills increases significantly, this will draw some cash from the RRP. Ben Jeffery, interest rate strategist at BMO Capital Markets, said, but I think the overall size of the Fed’s balance sheet and the level of reserves will ensure that we at least for the next few quarters every day All can see quite large numbers.