Since the FOMC hiked interest rates in December, more than $100 billion in non-operating deposits have left the banking system. However, it was not the o/n RRP facility is that absorbed these outflows. Rather, it was the U.S. Treasury bill market with the help of the foreign RRP facility. Many clients have asked the Fed about the foreign RRP facility, and the response they got was that it is just a service offering for foreign central banks. But in our view it is more, far more than “just” a service offering. It is a policy tool the Fed has been using to exert upward pressure on bill yields and to facilitate the draining of reserves and the rotation of cash pools out of non-operating deposits and into Treasury bills. At a take-up of $220 billion (and rising), the foreign RRP facility is already a more prominent policy tool than the o/n RRP for money funds, which has a trend take-up of a mere $80 billion (and falling) – not bad for a policy tool that no Fed officials has ever mentioned before in a policy context. The foreign RRP facility is a game-changer in how U.S. Treasury bills trade.
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