What is the Fed's RRP (Reverse Repo Program)? The "Fed Open Market Trading Desk" sells a security (SOMO) with an agreement to repurchase it at a specified price & time in the future. It helps protect the Fed funds rate and absorbs near term liquidity. Why is this so important?
As the size of RRP increase, it usually signifies the market is saturated with liquidity and tapering will be close(6 months?) Banks have various options to invest excess liquidity, but rising gov't transfer, excess corporate cash, & limited bank loans increase cash on hand.
The Loan-to-Deposit (LDR) is Total Loans/Total Deposits, which ideally is near .8 or said a different way the bank invested $.80 of every $1 received. In the current market, the bank has made limited loans due to shrinking opportunities & returns married with MASSIVE deposits.
The Fed's RRP takes the excess liquidity onto their sheets (temporarily) to keep the O/N from going negative and keep the Fed Funds Rate "range". These funds will be held at the Fed either O/N or an agreed time period discussed earlier.
Banks are trying manage liabilities, but by the Fed maintaining easy monetary policy pressure will mount on bank balance sheets increasing the size of the RRP. It offers a short term solution for a long term problem because the excess money only temporarily leaves the system.
It is the same way as taking flood water and moving it away from the dam about to breach, but only dumping it back up the river hoping the flood subsidies by the time the water comes back downstream.
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I think it is important to highlight some underlying issues in the global crude market. 1) the physical market has been weak for months and not the "weeks" being peddled by the narrative shift 2) the bigger issue now is the rising rates at the EM level and "new" demand headwinds
We have talked about (been bearish) the emerging market world as cracks were already forming before the US 10 Yr took off. Monetary policy is already shifting tighter as Fiscal tries to remain accommodative- but costs are rising and pressuring government balance sheets.
COVID cases are rising again in some key spots limiting travel and the "normalization" of activity throughout Asia/Europe. The reduction of activity will only stress balance sheets further as jobs data/inflation impact underlying wages and spending.