Recently, the expectations for a loose cycle by the Federal Reserve have been heating up, despite the recent reduction in US Treasury supply, the funds held in the Federal Reserve's overnight reverse repurchase agreement tool RRP continue to decline, reflecting mmf's desire to lock in higher interest rates.
A sign of excess liquidity in the American financial system - the volume of the Federal Reserve's overnight reverse repurchase (RRP) tool hit a new low.
New York Fed data shows that on Monday, September 16th, a total of 44 counterparties, including banks, money market mutual funds, and government-sponsored enterprises, collectively deposited $239.4 billion in the Fed's RRP tool, marking the first time since 2021 that the single-day usage of RRP fell below $250 billion. The number of counterparties using RRP hit a new low since June 2021.
As of Monday, the usage of RRP has shrunk by nearly 91% from the single-day high record of $2.554 trillion on December 30, 2022, and has also decreased by almost 64% from the high point less than three months ago. At the end of the second quarter on June 28 this year, the usage of RRP had risen to $664.6 billion, reaching a new high since January 10, and then the funds deposited in RRP by institutions such as money market funds gradually declined.
Wall Street Journal previously mentioned that the dramatic drop in the scale of RRP usage indicates that the market liquidity is once again raising a red flag, and the risk of a liquidity crisis breaking out next is increasing. Some Wall Street insiders had warned that the consumption of the policy tool RRP shows that the excess liquidity in the financial system has been drawn off, and the bank reserve balances are not as ample as the policymakers thought.
From the suspension of the U.S. government's debt limit restrictions in June last year to April this year, due to the sharp increase in the supply of U.S. Treasury bonds, the demand for RRP in the market decreased by approximately $1.8 trillion. In April, Wall Street strategists had predicted that RRP would be completely depleted in the first half of this year. As U.S. government bond issuance declined and the uncertainty of the timing of the Fed's interest rate cuts affected, the usage of RRP began to stabilize.
Recently, the market's expectation of a new easing cycle of the Fed has been increasing, despite the recent reduction in U.S. bond supply, the funds within RRP have started to trend downward again. Analysts believe that this is due to money funds hoping to lock in higher interest rates, as well as an increase in other assets they can invest in.
Barclays reiterated earlier this month that it expects the balance of RRP funds to drop to less than $150 billion by the end of this year, and still expects the Federal Reserve's balance sheet contraction (balance sheet reduction) - the so-called quantitative tightening (QT) to end in December this year.
Editor/Lambor