Demand for the Federal Reserve’s reverse repurchase (RRP) facility slowed, falling below $2 trillion for the first time since June 2022 amid a flood of Treasury debt issuance after the US debt ceiling was extended a few weeks ago. Reverse repo usage hit a record $2.554 trillion on Dec. 30. C
With the debt ceiling suspended until Jan. 1, 2025 under a deal signed two weeks ago by President Joe Biden, the Treasury lost no time in issuing bills to build up its cash account at the Fed, focusing on shorter-tenor benchmark securities and cash management bills (CMBs). In guidance released last week, Treasury now expects its cash balance to be approximately $425 billion at the end of June.
Money market funds are one of the biggest participants in the reverse repo market. “It’s a very positive sign that money funds are shifting cash out of the facility into bill purchases. I think part of it is helped by the fact that Treasury leaned their bill supply toward the shorter end of the curve to get out of reverse repos,” said Gennadiy Goldberg, senior rates strategist, at TD Securities in New York, speaking to Reuters.
Aside from the increase in T-bill issuance, the higher overnight repo rate of 5.11% on Thursday, six basis points higher than the reverse repo rate, was also a factor luring cash out of reverse repos, analysts said.