Financial institutions flush with cash have flocked to the Federal Reserve’s reverse repurchase (RRP) facility, loaning the U.S. central bank money at 0% interest and raising concerns in the bond market that key short-term interest rates could actually fall below zero.
Volume at the Fed’s overnight reverse repo window surged to $433 billion on Tuesday, according to New York Fed data. Analysts said that was the third largest uptake ever, the biggest being $474.6 billion on Dec. 31, 2015.
A little over two months ago, around mid-March, there was zero reverse repo activity.
That has pressured front-end interest rates, with some overnight repo rates periodically turning negative this year. On Monday, the overnight repo rate fell to -0.01%, the lowest since late March, but recovered on Tuesday to 0.02%.
The Fed launched its reverse repo program in 2013 to soak up extra cash in the repo market and create a strict floor under market rates, particularly its policy rate. Eligible counterparties lend cash to the Fed in return for Treasury collateral on an overnight basis.
In this year’s March policy meeting, the Fed raised the amount counterparties can lend to $80 billion, from $30 billion.
Together with other deposits, the Fed has been draining more than $500 billion per day in bank reserves, according to Barclays.
Reference: Reuters
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