Fed Reverse Repo Facility Nears $1 Trillion In Use, Debt Ceiling Deadline Complicating Treasury Markets

There has been some anomalous behavior in treasury markets lately, perhaps best exemplified by the record set Wednesday when a total of $992 billion was parked in the Fed’s Reverse Repo facility where counterparties like large MMFs and other big market participants can park their cash with the US Central Bank. On Thursday, the reverse repo volumes inched off their successive highs on Tuesday and Wednesday and fell to around $742.6 billion on Thursday and $731.5 billion today.

While the Reverse Repo facility filling up may have an ominous sound to it, if banks were concerned about excessive outflows to the Fed at their expense, they could always raise the rate they offer to retain the business.

The demand for the Fed’s specialized facility has been dramatically increasing since one of the more obscure actions from their recent meeting when they raised the offering rate to 0.05% from 0% in response to the flood of liquidity beginning to eclipse the capacity of funding markets for the US dollar. Several activities of the Fed that follow under the umbrella of quantitative easing are pushing a large amount of reserves into the system.

We mentioned that these rate rises were counterintuitive when the Fed did them because, despite raising a technical rate, the effect of th...

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