Today 54 counterparties took $534.9b at the Fed's fixed rate repo✨
RRP explainer: Bop it, twist it, reverse repo it? 🧵(ik)
RRP explainer: Bop it, twist it, reverse repo it? 🧵(ik)
1/Disclaimer: I am not an RRP expert - this is my attempt (🚧) at an explanation.
I highly recommend @aRishisays @AnalystDC and @FedGuy12 for better content⭐️
I highly recommend @aRishisays @AnalystDC and @FedGuy12 for better content⭐️
2/Yesterday, 59 counterparties took $502.9b (✨passing half a trillion✨) at the Fed’s fixed rate reverse repo.
RRP is important in keeping the market afloat - but why?
RRP is important in keeping the market afloat - but why?
https://twitter.com/SoberLook/status/1402556165876236288?s=20
3/An important component of RRP is reserves - and those are currently being created in two main ways
1. Treasury General Account Drawdown
2. Fed Asset Purchases
1. Treasury General Account Drawdown
2. Fed Asset Purchases
1. Treasury General Account
The TGA is what the U.S. gov runs most of its day-to-day thru + managed by NY Fed (liability on Fed bal sheet)
It got big bc of fiscal support - now, the tsy needs to reduce bc of 1) debt ceiling and 2) low rates
TGA Balance 👇Reserves👆/4
The TGA is what the U.S. gov runs most of its day-to-day thru + managed by NY Fed (liability on Fed bal sheet)
It got big bc of fiscal support - now, the tsy needs to reduce bc of 1) debt ceiling and 2) low rates
TGA Balance 👇Reserves👆/4
2. Fed Asset Purchases
when the Fed conducts QE, they buy bonds from banks and credit them with reserves
They do this at the clip of $120bn a month -more reserves enter the system
QE 👆 Reserves 👆/5
when the Fed conducts QE, they buy bonds from banks and credit them with reserves
They do this at the clip of $120bn a month -more reserves enter the system
QE 👆 Reserves 👆/5
But banks want a higher yield!! These are not 🤏juicy enough
They don’t want to hold these measly reserves
They don’t want to hold these measly reserves
When this happens, it can push money market rates (short-term debt investments) down below zero - which is the exact opposite of what the Fed is trying to do here
Enter the RRP
This is a facility (think of it like a parking garage or a drain) where investors (mainly money market funds) can park their money overnight with the Fed at the RRP rate (0%).
This is a facility (think of it like a parking garage or a drain) where investors (mainly money market funds) can park their money overnight with the Fed at the RRP rate (0%).
This works to make the RRP rate (and thus 0%) the floor for money market rates. The IOR (interest rate on reserves) acts as the ceiling here.
What does RRP do?
🔧Keeps markets functioning
💥Manage rates by keeping short-term rates down and prevents a lot of balance sheet pressure at the banks
🧃Reduces reserves and allows the QE juices to keep flowing 😌
🔧Keeps markets functioning
💥Manage rates by keeping short-term rates down and prevents a lot of balance sheet pressure at the banks
🧃Reduces reserves and allows the QE juices to keep flowing 😌
So there is a lot of cash.
The funny thing is that two months ago, there was NO volume in the RRP. But now it is $500bn.
It will likely be $1 trillion by end of year.
The funny thing is that two months ago, there was NO volume in the RRP. But now it is $500bn.
It will likely be $1 trillion by end of year.
However, the Fed is unconcerned.
In their eyes, RRP is doing its job.
In their eyes, RRP is doing its job.
The system is working
It is draining liquidity and controlling rates
The Fed could do more - if they increase their counterparty limit from $80bn, it would definitely get us well beyond that $1trn take-up.
It is draining liquidity and controlling rates
The Fed could do more - if they increase their counterparty limit from $80bn, it would definitely get us well beyond that $1trn take-up.
TLDR?
TGA reduction, Fed QE, keeping rates non-negative - RRP is a tool to do that. It is a drain for reserves. This is not an inherently bad thing- but it does mean that there is a lot of money in the system.
TGA reduction, Fed QE, keeping rates non-negative - RRP is a tool to do that. It is a drain for reserves. This is not an inherently bad thing- but it does mean that there is a lot of money in the system.
the Fed is very involved in the stock market (yes I did forget to number the rest of the thread + yes this was excluded from the thread for unknown reasons)
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