Is market liquidity pressure approaching? The usage of the Federal Reserve's reverse repurchase tool hits a new low since 2021
The Federal Reserve's overnight reverse repurchase agreement (RRP) usage scale was $28.818 billion, hitting a new low since April 2021, down from $57.202 billion the previous trading day. Citigroup strategists expect RRP usage to approach zero by the end of August. Wall Street is closely monitoring potential signals of stress in the financing market, as funds will begin to flow out of bank reserve balances once the RRP tool balance nears depletion
On Thursday, data from the New York Federal Reserve showed that the Federal Reserve's overnight reverse repurchase agreement (RRP) usage stood at $28.818 billion, marking a new low since April 2021, down from $57.202 billion the previous trading day. There were only 14 counterparties, also the lowest since 2021. Bloomberg data indicates that this number has gradually decreased from 62 since July, remaining above 30 for most of the time.
The usage of the Federal Reserve's reverse repurchase tool has hit a four-year low, with 14 institutions holding $28 billion in RRP, as the U.S. Treasury issues more short-term U.S. Treasury bonds to cover the growing deficit, attracting funds away from this key source of market liquidity. The RRP tool allows banks, government-sponsored enterprises, and money market mutual funds to lend cash to the Federal Reserve and earn interest.
As a measure of excess liquidity in the financing market, RRP usage has been declining. Following last month's increase in the debt ceiling, the U.S. Treasury has continued to issue tens of billions of dollars in short-term Treasury bonds to replenish cash balances. Since the end of July, when the balance was $214 billion, RRP funds have significantly decreased.
Citigroup strategists Jason Williams and Alejandra Vazquez Plata expect RRP usage could approach zero by the end of August.
The sharp decline in RRP has drawn Wall Street's close attention to potential signals of stress in the financing market, as once the balance of the reverse repurchase tool nears exhaustion, funds will begin to flow out of bank reserve balances. Bank reserves are crucial for providing a buffer to the market, maintaining smooth operations, and determining the extent of the Federal Reserve's balance sheet reduction.
The current bank reserve balance stands at $3.3 trillion, indicating that reserves remain at a sufficient level.
Federal Reserve Governor Christopher Waller, a popular candidate for Fed Chair, stated last month that the U.S. central bank should be able to reduce bank reserve levels to about $2.7 trillion
