Investors stashed a record amount of cash in an overnight facility at the Federal Reserve on Thursday, after the central bank started paying interest on the money to prevent negative rates taking hold in parts of the US financial markets.
The change, announced after its monetary policy meeting on Wednesday, came in response to concern from money market funds and banks that have struggled to find positive-yielding places to invest.
Nearly 70 market participants parked $756bn at the Fed via its reverse repurchase programme, according to data from the New York branch of the central bank.
That is roughly $172bn higher than the previous record earlier in the week, and $235bn more than on Wednesday, when only 53 groups tapped the facility.
“The sharp increase in usage demonstrates just how starved investors are for yield” in short-term debt, said Gennadiy Goldberg at TD Securities.
The Fed said it was boosting the RRP rate to 0.05 per cent from zero to support “the smooth functioning of short-term funding markets”, one of two technical adjustments it made on Wednesday. It also raised the interest it pays on excess reserves, which are deposited at the Fed by banks, from 0.1 per cent to 0.15 per cent.
Partly as a result of monetary and fiscal stimulus for the US economy, cash has been pouring into money market funds that invest in short-term government securities. The surge in demand for those securities has at times pushed yields below zero this year and threatened the viability of the $4tn industry.
The rate at which investors swap Treasuries and other high-quality collateral for cash in the repo market — another staple source of income for money market funds — has also dipped negative.
Wednesday’s adjustments helped to lift those rates from their ultra-low levels. The federal funds rate, the main policy rate used by the Fed, also rose to 0.08 per cent, closer to the middle of the central bank’s 0 to 0.25 per cent target range, having fallen earlier this year to as low as 0.04 per cent.
Jay Powell, the Fed chair, expressed little concern with the mounting usage of the RRP facility at his post-meeting press conference, indicating that it was working as intended.
“We think the reverse repo facility is doing what it’s supposed to do, which is to provide a floor under money market rates and keep the federal funds rate well within its range.”
Scott Skyrm, a repo trader at Curvature Securities, said the rate adjustments announced on Wednesday would help at the margin but RRP demand was likely to remain elevated. The Fed’s commitment to buying $120bn of government debt each month to stimulate the economy continues to exacerbate the mismatch between the amount of cash looking for a home and the number of feasible securities to buy, he said.
John Canavan, an analyst at Oxford Economics, said the scale of the increase in RRP usage on Thursday had been a surprise.
“This is not likely to be the end of the increase, and there is a good chance that the flood of front-end cash pushes RRP demand over $1tn at some point.”