Banks Buying Record Treasuries Driving 1-Month Bills to Zero

Rates on one-month Treasury bills are approaching zero as U.S. banks seeking to shore up balance sheets as the end of the second quarter approaches buy a record amount of U.S. government related securities.

The rate has declined to 0.0051 percentage point from as high as 0.041 percentage point earlier this month. At the same time, usage of the Federal Reserve’s fixed-rate reverse repo facility has surged. Money market mutual funds and other eligible counterparties allocated $137 billion yesterday to the facility. At the end of last quarter, the amount surged to $242 billion, the highest since the program was instituted last year.

The reverse-repo facility, which the central bank is testing as tool for when it eventually removes its unprecedented monetary accommodation, has been a popular place for investors to park cash in the final weeks of the quarter and year. Typically at those times dealer balance sheets come under pressure, making it harder for them to take cash in the repo market, historically driving money market rates lower.

“As cash investors prepare for limited supply of bank liabilities over quarter end, yields on Treasury bills and other front-end securities have declined and use of Fed reverse repo has increased,” Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York, wrote in a client note. “Dealer need to finance collateral has moderated which should reduce the upward pressure on repo rates following quarter end.”

Repo Rates

Government money-market funds holdings of Fed reverse repos rose between September and May increased by $65 billion, while Treasury and agency repos with dealers decreased by $38 billion, according to Fitch Ratings’ tracking of a universe of government-only money market funds with $881 billion in total assets.

Since the implementation of the Fed’s facility, repo rates have mostly held above the Fed’s fixed rate, currently at 0.05 percentage points, up from 0.01 percent when it first began. The average rate for borrowing and lending Treasuries for one day in the repo market was 0.149 percent yesterday, according to the DTCC GCF Treasury Repo index. That rate is up from 0.01 percent at the end of last year.

“From the perspective of the Fed’s program, the Fed fixed rate was moved up as well as the allotment cap, which made it a more attractive investment to the money funds,” said Robert Grossman, managing director of macro credit research at Fitch, said in a telephone interview on June 25. “While at the same time Basel III regulatory considerations have been leading banks to reassess wholesale short-term funding -- which is a macro trend that is holding for the moment.”

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.

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