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Liquidity: Difference between revisions
→Reverse Repo
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=== Reverse Repo === | === Reverse Repo === | ||
The Fed’s overnight repo and reverse repo facility (ON RP/RRP) allows MMFs to borrow from or lend to the Fed, using government securities as collateral and agreeing to buy or sell back those securities at agreed rates | The Fed’s overnight repo and reverse repo facility (ON RP/RRP) allows MMFs to borrow from or lend to the Fed, using government securities as collateral and agreeing to buy or sell back those securities at agreed rates on an overnight basis. They enjoy practically zero counterparty risk and use top quality government securities as collateral at remunerative rates.<ref>https://www.atlanticcouncil.org/blogs/econographics/fed-reverse-repos-hit-a-new-record-an-unhealthy-development/#:~:text=The%20Fed's%20overnight%20repo%20and,rates%2C%20on%20an%20overnight%20basis.</ref> | ||
The ON RRP facility has attracted a record amount of cash after enjoying growing daily transaction volume since mid-2021. | The ON RRP facility has attracted a record amount of cash after enjoying growing daily transaction volume since mid-2021. | ||
Its important to monitor it, because if the FED decided to lower the interest rate it pays, this could cause the reverse repo to drain | Its important to monitor it, because if the FED decided to lower the interest rate it pays, this could cause the reverse repo to drain since investors could decide to look for other assets for return. This could a lot of liquidity to bank reserves and markets. <ref>https://www.reuters.com/markets/us/sooner-or-later-fed-may-need-technical-tweaks-rate-control-toolkit-2023-02-01/</ref> | ||
* The reserve repo has been stable at about a trillion dollars since last year. <ref>https://www.newyorkfed.org/markets/desk-operations/reverse-repo</ref> | * The reserve repo has been stable at about a trillion dollars since last year. <ref>https://www.newyorkfed.org/markets/desk-operations/reverse-repo</ref> | ||