Repo overnight demand increases
Overnight demand for the Federal Reserve’s reverse repo program surged close to $1 trillion on Wednesday 30th June 2021. Is this a problem?
The repo system is an overnight money holding facility for banks and financial institutions. A short term parking system for billions of U.S. dollars.
The facility had been met with growing demand since April, as businesses look for ways to temporarily invest excess cash as trillions of fiscal and monetary stimulus continue to slosh through the economy.
The Fed is keen to reduce cash balances in the banking system to avoid any overnight rate from going negative. Negative rates are undesirable and could indicate a problem in the financial system.
The repo system soaks up some of the excess liquidity currently overwhelming U.S. money market funds, which have been flooded with cash this year exceeding total holdings of $4 trillion.
The Fed system pays users 0.05% but before that they were paid zero interest to hold risk free assets such as Treasury’s.
Rise in repo rates a concern?
Investors get nervous if repo rates increase as they are associated with credit crunches and banking crises.
Repo rates spiked in the 2008 financial crisis when banks didn’t want to to lend to each other. Is this a potential prelude to another problem brewing?
See here for more repo rate information.