Whereas cash market funds are flocking to the Federal Reserve’s in a single day reverse repurchase settlement facility for the yield, massive U.S. banks are utilizing this system to shed undesirable deposits.
Banks are rising as a key driver in demand for the Fed’s so-called RRP facility, the place utilization may method $1.5 trillion by the top of October, based on Financial institution of America strategist Mark Cabana.
Volumes surged over the previous month, reaching an all-time excessive of $992 billion on June 30, as the ability serves as an funding choice of final resort to mop up extra money, particularly with short-term funding charges hovering round zero.
The Fed’s steadiness sheet has continued to swell because of its ongoing asset purchases whereas the drawdown of the Treasury Common Account returns funds to the system. That in flip compelled banks to tackle extra cash, boosting deposits after the pandemic-era regulatory exemptions for reserves and Treasury securities expired on the finish of March.
“One very notable function of the Fed steadiness sheet progress is the reluctance of personal banks to soak up ongoing reserve and deposit progress,” Cabana wrote in a observe to shoppers. “From the big U.S. industrial financial institution perspective, the O/N RRP capabilities as a device to soak up extra money within the system that banks don’t need.”
On its name for second-quarter earnings, JPMorgan Chase’s Chief Monetary Officer Jeremy Barnum mentioned that leverage is now the financial institution’s “binding constraint” and acknowledged that “RRP helps a bit of bit on the deposit progress facet, which helps a bit of bit” with managing the agency’s supplementary leverage ratio.
Undesirable financial institution deposits have partially shifted to the cash market funds, who then make investments the money with the Fed on the RRP, which yields 0.05%. But complete cash market fund property, which have grown by about $125 billion because the center of March, across the time that utilization on the Fed’s facility began to climb, doesn’t account for your complete progress within the facility, based on Cabana. A lot of the RRP’s enhance is because of a shift in cash market holdings, the place funds have liquidated Treasuries and allotted the proceeds to the Fed’s operation.
Financial institution of America anticipates RRP demand pushing larger within the subsequent few months because the Fed’s asset purchases proceed and the Treasury’s money steadiness continues to dwindle “in a protracted debt restrict standoff.” A pointy enhance in balances on the facility may additionally sign massive cash market funds are maxing out their utilization, requiring coverage makers to extend the $80 billion per counterparty restrict.