Federal Reserve Reverse Repos is below $1 trillion for first time in two years

Federal Reserve Reverse Repos is below $1 trillion for first time in two years.

The total funds that investors are placing in a significant Federal Reserve facility have fallen below $1 trillion for the first time in over two years.

On Thursday, a collective $993 billion was deposited by 94 participants into the Fed's overnight reverse repurchase agreement facility, which is utilized by banks, government-sponsored enterprises, and money-market mutual funds to earn interest. This marks a substantial decrease from the record-high $2.554 trillion recorded on December 30 and represents the smallest amount since August 2021.

Deutsche Bank strategist Steven Zeng commented on the significant drop below $1 trillion, stating, "It's a big number. I can see it falling further with dealers owning so much of the new bond."

During Thursday's Treasury auction of the $24 billion 30-year bond, primary dealers acquired approximately twice the usual amount. These dealers often finance such purchases in the repo market, and the additional collateral could elevate overnight rates, potentially leading investors to withdraw more funds from the Fed's repo facility.

While demand for the facility has waned throughout the year, the Treasury's increased issuance of fresh bills has provided an alternative for short-term investors. Since June, money-market funds have been absorbing the Treasury's surge in bills, especially after President Joe Biden signed legislation suspending the debt ceiling until 2025.

As traders anticipate the Fed nearing the end of its interest-rate hiking cycle, the Treasury has issued around $1.76 trillion of bills on net. This influx has driven their interest rates above the offering yield on the Fed's facility, currently at 5.30%. Additionally, it has contributed to higher rates on other money-market assets like private repo.