Investors on Thursday hid a record amount of money in an overnight facility at the Federal Reserve, after the central bank began paying interest on the silver to prevent negative rates from setting in parts of the markets American financiers.
The change, announced after its monetary policy meeting on Wednesday, came in response to concerns from money market funds and banks that have struggled to find positive return places to invest.
Nearly 70 market players have parked $ 756 billion for the Fed through its reverse repo program, according to The data of the New York branch of the central bank.
That’s about $ 172 billion more than the previous record at the start of the week, and $ 235 billion more than Wednesday, when just 53 groups used the facility.
“The sharp increase in usage shows how hungry investors are for the yield” of short-term debt, said Gennadiy Goldberg of TD Securities.
The Fed said it was raising the RRP rate to 0.05% from zero to support “well-functioning short-term funding markets,” one of two technical adjustments it made on Wednesday. He also increased the interest he pays on excess reserves, which are deposited with the Fed by banks, from 0.1% to 0.15%.
Partly as a result of monetary and fiscal stimulus for the US economy, liquidity has poured into money market funds that invest in short-term government securities. The surge in demand for these stocks has at times pushed yields below zero this year and threatened the viability of the $ 4 billion industry.
The rate at which investors swap treasury bills and other high-quality collateral for cash in the repo market – another source of basic income for money market funds – has also turned negative.
Wednesday’s adjustments helped push those rates up from their ultra-low levels. The federal funds rate, the main policy rate used by the Fed, also rose to 0.08%, closer to the midpoint of the central bank’s 0-0.25% target range, after falling earlier this month. year at 0.04%.
Jay Powell, Chairman of the Fed, Express Little concerned about the increasing use of the RRP facility during its post-meeting press conference, indicating that it was working as expected.
“We believe the reverse repurchase agreement does what it is supposed to do, which is to provide a floor below money market rates and keep the fed funds rate well within its range.”
Scott Skyrm, repo trader at Curvature Securities, said the rate adjustments announced on Wednesday would help marginally, but RRP demand would likely remain high. The Fed’s commitment to buy $ 120 billion in government debt each month to stimulate the economy continues to exacerbate the mismatch between the amount of money looking for a home and the number of feasible securities to buy, did he declare.
John Canavan, an analyst at Oxford Economics, said the scale of the increase in RRP use on Thursday came as a surprise.
“This is probably not the end of the increase, and there’s a good chance the initial cash flow will push demand for RRP over $ 1 billion at some point.”