U.S. investors park their money in the Fed as a negative return on the market

A facility that allows money market funds and banks to park their money in the Federal Reserve picked up on record size on Thursday, with few options for investors and a usually reduced shortfall in ultra-short-term security yields. invest.

About 50 participants parked $ 485.3 million in the U.S. central bank through the Reverse Repurchase Program (RRP), according to the data From the New York branch of the Faith. The number surpassed a record $ 474.6 billion since 2015 on the eve of the New Year’s Eve system and was a significant increase from the $ 400 million set for Tuesday and Wednesday night this week.

If demand exists rose in recent months for facilities the yields on Treasury bills (maturing in a year or less) and rates for investors to exchange high-quality guarantees, such as the Treasury to get money in the money exchange market, have fallen below zero. The RRP pays 0 percent interest on the money deposited overnight.

“The increase in demand for the Fed’s RRP operations has been tremendous,” said John Canavan, an analyst at Oxford Economics. “It’s not over yet.”

At the heart of the problem is the cash-backed financial system, which has few viable short-term parking spaces. The Fed’s RRP facility has become a “valve relief” in the market, according to Canavan, giving investors a place to spare.

Excessive reserves in the banking system have risen since the beginning of the year, in part because the Fed buys $ 120 billion in the Treasury and securities backed by mortgages each month, along with distributing stimulus controls to help the pandemic recover with the federal government. Money market funds have attracted entry as a bank try to change deposits in these funds for regulatory reasons.

Compounding the situation, the supply of short-term debt has declined at the same time as demand has risen, in part because the Treasury has reduced its stock of bills in favor of issuing long-term debt.

Fed recently spread RRP installation making access available to more companies and raising daily limits.

Joseph Abate, a money market strategist at Barclays, said the facility was working to absorb additional money from the system at a time when Treasury bills with a maturity of less than a month are being traded with negative returns.

Some U.S. government short-term debt was quoted at a yield of minus 0.01 percent or minus 0.02 percent on Thursday.

“The large balances in the RRP indicate that while rates on the invoice and repo market are set at zero, the RRP reduces excess liquidity and keeps rates trading below zero,” he said.

Investors are particularly looking at the federal funds rate, the Fed’s main policy rate, which has fallen along with other short-term rates and is now below the central bank’s target range of 0-0.25 percent. It was 0.06 percent on Thursday.

Market participants believe that going 0.05 per cent could lead to more action from the central bank.

The Fed has stated that it is open to the RRP rate or the interest that banks pay on their reserves in the central bank to ensure that the rate of fed funds will not be lower.

“The Fed’s role in money markets is growing,” said Priya Misra, head of rates strategy at TD Securities. “It’s clear that the market is not functioning on its own.”