The Way You MOVE
Bond Volatility Moving Lower is Good for Liquidity
Over the past few weeks, we have discussed how the ongoing banking crisis, the Fed's language shift and easing monetary policies from major central banks have led to increased net liquidity in the U.S. and higher global USD liquidity.
One risk that these absolute liquidity levels face is a negation by the Fed’s reverse repo facility. The Reverse Repo Facility (RRP) is a tool used by the Federal Reserve to control overnight interest rates by decreasing the number of reserve balances in the banking system through reverse repo transactions. In a reverse repo transaction, the Fed sells securities with the agreement to buy them back later, providing an alternative investment option for money market investors when rates fall below the interest on reserve balances rate. When liquidity flows into the RRP, it is theoretically being drained from the private market (numbers below are dated by a few weeks).
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