Moments ago the Fed’s RRP operation totaled only $18.7 bln, the lowest level of participation since December 19, 2013 when the maximum bid per counterparty was only $1 bln compared to $30 bid since September 2014. In other words, program participants took only $18.7 billion worth of Treasury securities from the Fed, just months after the Fed expanded the reverse repo program to account for potentially hundreds of billions in reverse repo demand after the Fed’s 25 bps rate hike.
Moreover, today’s operations included only 18 participants, which is just 2 more than the 16 seen on Friday, the lowest since December 16, 2013.
As Scott Skyrm pointed out a few days ago when we hit a comparable low, “the ironic part is that the program was originally billed as a liquidity draining tool that the Fed needed to raise rates.” Instead, paradoxically, volume at the RRP continues to decline since the tightening in December.
What is going on? For the answer we looked to repo experts Stone McCarthy, but unfortunately they too are stumped:
We don’t have a wonderful explanation for the diminished participation. We wonder whether seasonal redemptions associated with the April 15 tax date may be crimping the liquidity of funds simply reducing the volume of liquid balances that would otherwise be put to work in the RRP program.
For sure, the General Collateral RP rate continues to trade well above the 25 bps associated with the Fed’s program. For this reason, the counterparties may find doing RP with dealers to be relatively more attractive than doing such with the Fed.
It further points out that one possible culprit is the GC repo rate which is about 20 points above the Fed’s 25 bps repo rate, and the larger the spread between these two rates, the lesser the participation in the Fed’s RRP program. “If the MMFs can earn materially more by doing RP with the Dealers, they will do less with the Fed.”
SMRA concludes as follows: “One thing is sure, the Fed’s RRP program is working as hoped. It is putting a floor on money market interest rates. And to the surprise of many, the size of these transactions need not be especially large.”
Well, it is putting a floor except for days like December 31 when the floor was breached. Meanwhile, a full answer remains elusive why virtually nobody is participating in the one program designed to keep the lower bound of the Fed Funds rate in check, but one thing is certain: when it comes to liquidity, there is suddenly a lot of it in the open market.
The post “We Don’t Have A Wonderful Explanation What Is Going On” – Reverse Repo Usage Plunges To Program Lows appeared first on crude-oil.top.