Investors set a record amount of money in a structure overnight in the Federal Reserve on Thursday, after the central bank began paying interest on the money to prevent negative rates from taking hold in parts of U.S. financial markets. .
The change, announced after its monetary policy meeting on Wednesday, came in response to concerns about money market funds and banks that have struggled to find places with positive returns to invest.
Nearly 70 market participants parked $ 756 billion to the Fed via its reverse repurchase program, according to data from the New York branch of the central bank.
It is about $ 172 billion higher than the previous record earlier in the week, and $ 235 billion more than Wednesday, when only 53 groups exploited the facility.
“The sharp increase in usage shows how hungry investors are in return” on short-term debt, Gennadiy Goldberg told TD Securities.
The Fed said it estimated the RRP rate at 0.05 percent from zero to support “the smooth running of the short-term financing markets,” one of two technical adjustments it made Wednesday. It also raised the interest paid on excess reserves, which are deposited with the Fed by banks, from 0.1 percent to 0.15 percent.
Partly because of monetary and fiscal stimulus to the U.S. economy, the number has been poured into money market funds that invest in short-term government securities. Growing demand for these securities has sometimes pushed yields below zero this year and threatened the viability of the $ 4tn industry.
The rate at which investors exchange Treasuries and other high-quality guarantees for money in the repo market – another major source of income for money market funds – has also fallen negatively.
Wednesday’s adjustments helped raise these rates from their ultra-low levels. The federal funds rate, the main policy rate used by the Fed, also rose to 0.08 percent, closer to the middle of the central range of 0 to 0.25 percent of the central bank, being down earlier this year to 0.04 percent.
Jay Powell, the president of the Fed, expressed little concern about the growing use of the RRP facility at its post-meeting press conference, indicating that it was working as planned.
“We think the reverse repo facility is doing what it needs to do, which is to provide a plan below money market rates and keep the federal funds rate well within its range.”
Scott Skyrm, a repo trader at Curvature Securities, said the rate adjustments announced Wednesday would help the margin but RRP demand was likely to 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, he said.
John Canavan, an analyst at Oxford Economics, said the scale of the increase in RRP usage on Thursday was a surprise.
“This is not likely to be the end of the increase, and there is a good chance that the front-end cash flow will push RRP demand above $ 1tn at some point.”