Fed Reverse Repo Facility Usage Soars, Rates Low at Year End

Usage of the Federal Reserve’s fixed-rate reverse repo facility surged before the end of the year as rates for borrowing and lending securities slide and banks shored up balance sheets.

The Fed Bank of New York drained $197.8 billion today, the largest amount in a test of its fixed-rate reverse repo facility that began operation in September, through 102 bidders. Yesterday, it drained $102.6 billion from the banking system with 75 bidders.

The facility, which the central bank is testing as tool for when it eventually reverses its unprecedented monetary accommodation, is a place for investors to put cash during the final week of the year. Typically at the end of the year, dealer balance sheets come under pressure, making it harder for them to take cash in the repo market, historically driving repo rates lower. This is the first year-end where investors have the option to do repos with the Fed, providing an alternative place to park cash of the end of the calendar year.

“During year-end, dealers tend to be less reliant on financing through the money-fund community and tri-party repo market overall, so investors are utilizing other options such as the Fed’s facility,” said Kenneth Silliman, head of U.S. short-term rates trading at Toronto-Dominion Bank’s TD Securities unit in New York. “The reduction in bill supply that has occurred in recent months is also having an effect, triggering money-market funds to use the Fed’s program as an investment alternative.”

Repo Rates

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties.

The Fed’s fixed-rate reverse repo facility has a 0.03 percent rate. It is open to Fed’s 139 tri-party reverse repo counterparties, which include 94 money-market mutual funds, six government-sponsored entities, 18 banks and the Fed’s 21 primary dealers.

The average rate for borrowing and lending Treasuries for one day in the repo market was 0.017 percent yesterday, matching the lowest since Aug. 21, according to the DTCC GCF Treasury Repo index. That rate is down from as high this quarter of 0.255 percent on Oct. 16.

The overnight Treasury general collateral repurchase agreement rate opened today at 0.03 percent, according to ICAP Plc, the world’s largest inter-dealer broker.

Dealer Finance

Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate, which is in a range of zero to 0.25 percent, are called general collateral. Those in highest demand have lower rates and are called “special.”

The Fed allotted $9.4 billion in reverse repos in the inaugural test on Sept. 26 and the facility has averaged $11 billion a day prior to this week. The collateral for the transactions has been limited to Treasury debt.

Fed policy makers, while still buying bonds to support the economy, have also been developing methods to eventually help withdraw record monetary accommodation. Along with raising the overnight bank lending rate, Fed officials have said they may use tools including reverse repos to withdraw or neutralize cash in the banking system.

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