Investors stashed a record amount of cash in an overnight facility at the Federal Reserve on Thursday, after the central bank began paying interest on funds to prevent negative rates from taking hold in parts of US financial markets.
The change, announced after Wednesday’s monetary policy meeting, came in response to concerns about money market financing And the banks that struggled to find places with positive returns on investment.
According to him, nearly 70 market participants have blocked $756 billion in the Federal Reserve through the reverse repo program. data From the New York branch of the Central Bank.
That’s about $172 billion higher than the previous record earlier in the week, and more than $235 billion on Wednesday, when only 53 groups tapped the facility.
Gennadiy Goldberg of TD Securities said the “sharp increase in usage demonstrates how hungry investors are for yield” in short-term debt.
The Fed said it boosted its RRP to 0.05 percent from zero to support the “smooth functioning of the short-term funding markets,” one of two technical adjustments it made on Wednesday. It also raised the interest he pays on excess reserves, which banks deposit in the Federal Reserve, from 0.1 percent to 0.15 percent.
Partly as a result of monetary and fiscal stimulus to the US economy, cash flows into money market funds that invest in short-term government securities. A surge in demand for those securities at times drove yields below zero this year and threatened the viability of the $4 trillion industry.
The rate at which investors exchange Treasuries and other high-quality guarantees for cash in the repo market – another major source of income for money market funds – has also fallen negatively.
Wednesday’s adjustments helped lift those rates from very low levels. The federal funds rate, the main policy rate used by the Federal Reserve, also rose to 0.08 percent, closer to the middle of the central bank’s target range of 0 to 0.25 percent, after falling earlier this year to 0.04 percent.
Jay Powell, Chairman of the Federal Reserve, expressed Little attention was paid to the increasing use of the RRP facility in his press conference following the meeting, indicating that it was working as intended.
“We think the reverse repo facility is doing what it’s supposed to do, which is provide a floor under money market rates and keep the fed funds rate within its range.”
Scott Skyrim, repo trader at Curvature Securities, said the price adjustments announced on Wednesday will help margin, but demand is likely to remain high. He said the Fed’s commitment to buy $120 billion in government debt each month to stimulate the economy continues to exacerbate the mismatch between the amount of cash looking for a home and the number of securities worth buying.
The scale of the increase in RRP use on Thursday came as a surprise, said John Canavan, an analyst at Oxford Economics.
“It is unlikely that this will be the end of the surge, and there is a good chance that the influx of cash provided will push the RRP request above $1 trillion at some point.”