The Tell: Fed’s $2 trillion daily repo facility to see high demand slow next year, says BofA

by | Aug 22, 2022 | Stock Market

Wall Street’s go-to spot for parking cash overnight finally might be getting some competition next year. Ever since May, demand for the Federal Reserve’s overnight reverse repurchase facility, or the RRF, has topped the $2 trillion mark daily, nearly double its $1 trillion daily level about a year ago.

The facility has played a vital role in financial plumbing over the past two years, as a place for money-market funds, banks and other eligible users to sock away cash at the Fed, after trillions of dollars’ worth of pandemic aid began sloshing through financial markets and economy. Use of the facility, however, has remained high this year, even as the Fed reversed its easy-money stance, “because alternative investment rates are so low” and because money-market funds that heavily rely on the program remain hesitant about the central bank’s interest-rate hiking plans, said BofA Global’s U.S. rates team led by Mark Cabana, in a Monday client note. Along with several jumbo Fed rate hikes recently, 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 bill supply to be “the most direct way to drain” demand for the repo facility, but also as banks “compete for funds in time,” even though that process is “just getting started,” the team said. This chart shows the upward march in overnight repo use since April 2021, as the relative attractiveness of 1-m …

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