Thread by @biancoresearch

1/25
My latest podcast, on the Fed's RRP, its surging growth and what does it mean.

Also, a long-ish 🧵with lots of charts to detail what this is all about.

iTunes: podcasts.apple.com/us/podcast/140…
Spotify: open.spotify.com/episode/7kUig4…

2/25

As the chart below shows, the amount of money parked at the Federal Reserve’s reverse repo (RRP) facility topped $2 trillion at the end of last week.

3/25

Each day the Fed reports the number of counterparties using the reverse repo facility. Last Friday 99 "bidders" used the facility, the highest non-quarter or year-end measure ever.

4/25

So, who is eligible to use this facility? The next graphic shows the counterparties are broken down into three categories:

* 15 banks

* 15 GSEs (such as Federal Home Loan banks)

* 104 money market mutual funds (run by 31 money market fund complexes like Blackrock)

5/25

With only 30 possible bidders between the banks and GSEs, the majority of last Friday’s 99 bids came from money market funds (MMMFs).

6/25

While the Fed does not offer details on who is using its reverse repo facility, MMMFs are required to disclose their holdings in their monthly SEC filings.

This is shown next.

7/25

The black line shows the total reverse repo (RRP) held by MMMFs. The bars further break down this amount by govt, prime, and tax-exempt MMMFs.

Green (bottom) shows the percentage of RRP held by MMMFs.

As of April 30, 2022, 87.6% of all RRP was held by MMMFs.

8/25

The next chart shows the 10 largest holders of reverse repo among MMMFs.

As of April 30, 2022, Fidelity held $410B of RRP. Vanguard was second with $180B. JP Morgan was third with $140B.

9/25

The next chart looks at the RRP market from a different angle. 37.9% of MMMFs’ assets are RRP with the Fed, the highest on record.

10/25

The next chart shows various short-term interest rates.

If 87.6% of all RRP is held by money market funds, who owns the other 12.4%?

See the red line that shows interest on reserves (IOR).

11/25

IOR is 0.90%, set 10 bps the upper end of the current funds rate (now 1.00%).

IOR is 10 basis points above the RRP rate (thick black) of 0.80%, which is set 20 bps below the upper end of the current federal funds rate.

12/25

Banks have a higher-rate option via IOR, so their usage of the Fed’s reverse repo facility is zero.

That means GSEs effectively account for the other 12.4% of repo holdings.

13/25

MMMFs can get a 0.80% rate with the NY Fed as the counterparty. This rate is the same as conventional ON repo (Wall Street counterparty) or ON Commerical Paper.

It makes sense that MMMFs are choosing to park their money at the Fed’s RRP over these other options.

14/25

T-bills are often a viable option for MMMFs with a similar credit risk as the NY Fed.

But as the chart above shows, the 1-month T-bill rate (orange) is well below the RRP rate.

15/25

So why are T-bill rates so low? The Treasury has cut back on issuance due to a surge of tax payments.

As the chart below shows, the Treasury’s daily cash balances (aka, The Treasury General Account, or TGA) are elevated.

16/25

Since only some MMMFs are eligible for the Fed’s RRP, those that are not eligible have been aggressively bidding for a reduced supply of 1-month T-bills.

Why don’t these funds extend maturities to the 3-month bill that is yielding over 1%?

17/25

MMMFs do not technically sell. They let securities mature/reinvest.

With the Fed telegraphing more 50 bps hikes coming, MMMFs have shortened their maturities (bottom panel) to get their holdings to mature as fast as possible so they can reinvest at a higher yield.

18/25

What’s Next For RRP? Even higher levels?

To date, usage of the Fed’s RRP has grown because the rate offered is competitive/better than many market rates.

In the coming weeks/months, we could see cash shift away from bank deposit accounts and toward MMMFs.

19/25

As the next chart shows, MMMFs (blue) exceed bank deposit rates (orange). The spread is the largest margin in years (bottom/red).

20/25

Banks are flush with reserves after 13 years of QE and do not need more cash, so they continue to offer near 0% on bank accounts.

MMMFs are dictated by market rates and the RRP rate.

MMMFs rates are going up 1% in the next couple of months as the Fed hikes more.

21/25

This shift of cash out of banks is already underway.

Cash balances with banks are falling, down $1 trillion since last November.

22/25

Assets in money market funds have held up slightly better, with a smaller drop when compared to cash in banks.

23/25

Yesterday (June 1) the Fed officially started QT. They will reduce their balance sheet by $47.5 billion in June, ramping up reductions to $95 billion/month by September.

Many correctly fret this tightening will have an adverse impact on the economy and/or markets.

24/25

An equally concerning consideration is the potential draining of reserves away from banks and into non-bank MMMFs

RRP drains reserves from the banking system. The cash still exists, but it has restrictions on its use as collateral in the financial system.

25/25

So, the Fed is draining money via QT, and their RRP is another way to drain reserves, possibly creating a "double tightening."

This has never happened at this scale before, and we are unsure of its potential impact.

Bottom line, reserves are leaving fast via two drains.