Wall Street’s preferred spot to park cash overnight could see some competition next year.
Demand for the Fed’s overnight reverse repo facility, or RRF, has surpassed the $2 trillion per day mark since May, nearly double the $1 trillion per day level a year ago.
The facility has played a vital role in the financial pipeline over the past two years as trillions of dollars worth of pandemic aid begins to flow through financial markets and the economy After wreaking havoc, serve as a place for money market funds, banks and other eligible users to deposit cash with the Fed.
However, despite the Fed’s change in its stance on easy monetary policy, the use of the tool has remained high this year “because rates on alternative investments are so low” and money market funds have responded with support from Mark Cabana Relying on the program remains hesitant about the central bank’s rate-hike plans, the U.S. rates team at BofA Global, led by BofA Global, said in a client note on Monday.
and the last few massive Fed rate hikes, the facility’s overnight rate has climbed to 2.3% from 0.05% a year ago.
Market dynamics should begin to shift in early 2023, with higher supply of notes being the “most immediate way to churn” the team said that while the process “has only just begun,” banks are “in a timely manner” Compete for funding”.
This chart shows an overnight uptrend using repos from April 2021 as the relative attractiveness of 1-month notes declines:
Economists expect Federal Reserve Chairman Jerome Powell on Friday will reiterate the central bank’s plan to tighten financial conditions until it can bring inflation back to its 2 percent target range, even if that means triggering a recession.
The Fed’s policy rate has already been raised to a range of 2.25%-2.5%, with another 75bps hike in September. Consumer inflation was 8.5% annualized in July.
After the S&P 500 SPX, concerns over high interest rates that could derail the U.S. economy have been weighing on stocks in recent sessions,
Monday, S&P 500 and Dow Jones Industrial Average Dow Jones Industrial Average, -1.91% recorded its biggest one-day drop in two months, while the 10-year Treasury bond rate TMUBMUSD10Y, 3.017% exceeded 3% for the first time since June.
Banks, on the other hand, can benefit from higher interest rates, especially when they help boost yields. Bank of America’s rates team said that “the Fed appears to be perfectly fine” using its repo facility and “may see this as an important way to encourage more competition for bank funding.”
Meanwhile, they expect the Fed to Its balance sheet will fall to about $8.5 trillion by the end of this year and to about $6.5 trillion by the end of 2025.