Neutralizing QT

Published on October 30, 2023 by Premium

The rapid decline in the Fed's RRP facility has not impacted financial conditions, but will eventually provide a modest degree of easing in the coming months. RRP balances have declined by almost $1.1t since June largely due to significant bill issuance, which financed a $800b increase in the Treasury General Account. The balance of the decline went into commercial banks and vanished through QT. With net bill issuance set to increase, the RRP may approach

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A Beautiful Replenishment

Published on July 17, 2023 by Premium

The Treasury successfully replenished the Treasury General Account with minimal market disruption by draining the RRP through aggressive bill issuance. Treasury announced its intention in early June to refill the TGA by aggressively issuing short dated bills, which are particularly attractive to money market funds. The surge in issuance pushed bill yields above the expected path of the RRP and enticed money funds to move money out of the RRP and into bills. The rapid

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Reserves and Asset Prices

Published on June 5, 2023 by Premium

A rapid decline in bank reserves is a headwind to all asset prices, but it need not be significant. In our two-tiered monetary system, a decline in bank reserves means both banks and non-bank investors have less cash and thus potentially less demand for financial assets. Banks may have less demand for high quality liquid assets like Treasury securities and non-bank investors may have less demand for riskier assets. In addition, while a decline in

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Probing LCLoR

Published on May 15, 2023 by Free

Bank reserves are on track to approach a common estimate of the Lowest Comfortable Level of Reserves (“LCLoR”) within a few months. At the moment, reserves sit around $3.2t and a common Fed estimate places LCLoR at around $2.2t (8% of GDP). In addition to quantitative tightening, two events may soon reduce bank reserves to around $2.2t. First, the RRP is likely to steadily increase as MMF assets continue to rise and FHLB debt issuance

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Trapped Liquidity

Published on December 19, 2022 by Free

A change in the underlying plumbing of the financial system is making it unlikely that QT can run its expected 2+ year course. An ideal QT would drain liquidity in the overall financial system while keeping liquidity in the banking sector above a minimum threshold. That is only possible if the bulk of the liquidity drained is sourced from the $2t RRP, which holds funds owned by money market funds. MMFs could facilitate QT by

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The Reserve Gap

Published on September 6, 2022 by Free

A rapid decline in the level of bank reserves would be an obstacle to QT that may prompt action from the authorities. An aggressive QT was premised on first draining the large RRP balances, but the monetary plumbing suggested that was never likely. Banks can easily maintain their own reserve levels, but their own target levels are significantly below those of the Fed. This implies that bank reserve levels will likely fall below the Fed’s

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Turbo Tightening

Published on May 31, 2022 by Free

The money supply is set to contract just as investors are clamoring for cash to hide from declines in both equities and bonds. A combination of increasing MMF allocation to the RRP and QT may drain ~$1t of bank deposits by the end of the year. The Treasury’s decision to further cut bill issuance will keep money market rates very low and likely push the RRP to over $2.5t by the end of the year.

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Draining the RRP

Published on April 11, 2022 by Free

The $1.7t in the RRP can help finance the upcoming deluge of coupon Treasuries, but it won’t be easy. Treasury bills will easily be funded, but the bulk of the upcoming supply from net issuance and QT is likely coupons. There are only two ways the RRP can finance coupon Treasuries: 1) funding repo loans to leveraged Treasury investors or 2) funding money fund redemptions to cash Treasury investors. Both mechanisms are subject to frictions

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The Elasticity of 5 Basis Points

Published on June 21, 2021 by Free

Large money market investors will move billions for even a basis point. A 5bps increase to the RRP offering rate led to a $200b+ surge in participation, but there is a wrinkle to the story. The bulk of the increase likely came from Government Sponsored Enterprises (“GSEs”) who were leaving hundreds of billions at 0% in their Fed account, so it was not an incremental flow from the private sector. That being said, the 5bps

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ON RRP Take-Up Will Go Much Higher

Published on June 1, 2021 by Free

The humble ON RRP is in the spotlight as take-up marches steadily upwards. It will go much, much higher. Increasing participation is largely a function of two structural forces in the financial system: on-going Fed QE ($120b/month) and Basel III constraints. On the margins, changes in the level of the TGA have some impact as well. Water pouring into a glass remains in the glass, until the glass is full and then every incremental drop

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