Fed Repo Facility Sinks Below $1 Trillion as Bills Stand Out

(Bloomberg) -- The amount of money that investors are parking at a major Federal Reserve facility dropped below $1 trillion for the first time in more than two years.

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A total of 94 participants on Thursday put a combined $993 billion at the Fed’s overnight reverse repurchase agreement facility, used by banks, government sponsored enterprises and money-market mutual funds to earn interest. It marks a steep decline from a record $2.554 trillion stashed on Dec. 30 and is the smallest sum since August 2021.

“It’s a big number,” said Deutsche Bank strategist Steven Zeng, referring to the decline past $1 trillion. “I can see it falling further with dealers owning so much of the new bond.”

Primary dealers on Thursday took down about twice as much of the Treasury’s $24 billion 30-year bond auction as normal. Dealers often finance those purchases in the repo market, and the additional collateral stands to push overnight rates higher — a move that could prompt investors to pull more cash out of the Fed’s repo facility.

Read: Treasury Yields Soar After Historically Poor Bond Auction Result

Demand for the facility, however, has been fading this year as the Treasury ramped up fresh bill issuance, offering an alternative for short-term investors. Money-market funds have been scooping up the Treasury’s deluge of bills since June, after President Joe Biden signed legislation suspending the debt ceiling until 2025.

That buying has accelerated as traders bet that the Fed is near the end of its interest-rate hiking cycle, giving them room to allocate their record amount of assets into bills — without the fear that they’ll miss out on further rate increases.

The Treasury has issued roughly $1.76 trillion of bills on net, and that’s helped drive their interest rates above the offering yield on the US central bank facility — currently 5.30%. This deluge has also helped push up rates on other money-market assets like private repo.

But as usage of the Fed’s facility fades, Wall Street strategists are weighing whether there will be further impact on the central bank’s policy decisions. If demand falls toward zero, strategists say, the Fed will have to halt its quantitative tightening program because excess liquidity will have been completely drained and bank reserves will have reached a point of scarcity.

(Adds strategist comment in third paragraph and bond auction reference in fourth paragraph.)

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