Fed reverse repo volume hits US$1t as debt ceiling looms

New York

VOLUME at the US Federal Reserve's reverse repurchase facility topped US$1 trillion last Friday for the first time as investors and financial institutions continued to pour cash into the overnight window.

Demand for the Fed's reverse repo facility has surged as the US debt ceiling looms, the Treasury department cuts down on its bill issuance and financial firms struggle to find places to invest their excess cash.

The financial system is swimming in about US$4 trillion in reserves, which are rising in part because of the US central bank's asset purchases, the drop in Treasury bill issuance and a rapid drawdown in the government's store of funds at the Fed.

The Treasury General Account, or TGA, has dropped by more than US$1 trillion since last autumn. The Fed said firms parked US$1.04 trillion overnight at the reverse repo facility last Friday. There were 86 bidders, including money market funds and other eligible financial institutions.

Volume at the reverse repo facility soared further a month ago after the Fed raised the rate it pays on reverse repo agreements to 0.05 per cent from 0 per cent as part of technical adjustments to keep the effective federal funds rate from falling too low.

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The Treasury department had to run down its cash balances ahead of July 31, when the nation's debt ceiling came back into effect. That pushes more cash into a financial system already swimming with liquidity.

The Treasury department said in May that it was targeting a cash balance of US$450 billion by July 31. As at Wednesday's data, it was US$537 billion. "It is forcing them to pay down their bill supply to get down to this number, maybe more quickly than they would want," said Gennadiy Goldberg, senior US rates strategist at TD Securities.

Analysts say demand for the Fed's reverse repo facility could keep rising as reserves remain elevated. Usage of the programme could top US$2 trillion by the end of the year, estimates Scott Skyrm, executive vice-president in fixed income and repo at Curvature Securities.

Fed chair Jerome Powell said last week that the programme is working as intended by helping to set a floor for short-term interest rates and ensuring that rates stay within the Fed's target range. REUTERS

READ MORE: US debt ceiling suspension ends