by Lee Adler, Wall Street Examiner
Here’s What Fed’s Reverse Repo Scam Means
A couple of days ago I got a great question from a Liquidity Trader subscriber days ago.
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Hi Lee,
The NY FED issued this notice last Thursday.
Doesn’t this mean they’re reducing liquidity in the system?
Thank you for the great work you do, you are the only one informing the public of the true nature of the beast.
Chet
My short answer to Chet was this:
It’s a great question, so thank you for noticing this and thinking enough to ask me!
Technically, it means they want to have room to drain excess liquidity, yes. In practice it has no impact, and will have none. RRP operations have been essentially zero for ages because there is no excess liquidity in the system.
Now, I want to flesh out that answer a bit, because Chet raised an important issue.Here’s what the Fed said:
The Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct overnight reverse repurchase agreement (ON RRP) operations with a per-counterparty limit of $80 billion per day, effective March 18, 2021. The increase in the per-counterparty limit from the current level of $30 billion per day reflects the growth and evolution of U.S. dollar funding markets since the limit was last changed in 2014 and helps ensure that the ON RRP facility supports effective policy implementation.
All other terms of ON RRP operations remain the same.
Wait. WHAT?
The increase reflects the growth of US dollar funding markets? Helps insure effective policy implementation? $30 billion per day PER COUNTERPARTY? To $80 billion per day PER COUNTERPARTY? WTF are they talking about? Which bank or MMF has $30 billion in excess liquidity?
I’ll tell you which. Not one of them. Not one stinkin’ one.
No one has using this facility! There is NO EXCESS LIQUIDITY in the system, despite what the Wall Street captured media would have us believe. There have been a couple of exceptions in the past few weeks, but there’s a temporary cause for that, and we know exactly what it is.Let’s look at the utilization of the RRP facility since January 2020, 2 months before the pandemic crash.
The only time that there was significant utilization of this facility was during the pandemic panic when the Fed was in the process of pumping $3 trillion into the system. That including at that time, nearly $400 billion of outright repo loans to Primary Dealers between February 28 and March 17. Some dealers turned that around and lent it back to the Fed in the form of RRP. That’s the reason for the massive surge in RRP back in March.
They paid all of that back when the Fed ramped up permanent QE in April-May. Since then there were, zero, zilch, nada, zip, RRPs lent to the Fed, until a couple of weeks ago, when we started to see a few billion a day here and there.
Why lately? Because the US Treasury started redeeming T-bills, paying off expiring bills rather than rolling them over as usual. Over the past month the Treasury has paid down some $300 billion in outstanding bills.
Those paydowns put cash back in the accounts of the holders of the expiring bills. These are mostly dealers, banks, and money market funds, who the Fed designates to participate in the RRP program, under the theory that the RRPs will drain excess cash from the system because these institutions will lend that cash to the Fed overnight. That’s all a reverse repo is.
This is a Fed Con Job
This is a Fed con job. Just like most of what the Fed does. Outright purchases of Treasuries and MBS are real money, with a real impact. Virtually everything else the Fed does is a con, a scam. The idea that the Fed can jawbone the market one way or another is a Wall Street myth. The Fed promotes that myth. But the fact is that money moves the market. Talk, and these sideline games the Fed plays, are all garbage.
Let’s look at the last 2 days of reported RRPs. On March 18, the total was $26.9 billion. That’s way more than the usual zero, but still not much in the overall scheme of things. Then on March 19, it was $18.9 billion. Strangely enough, the Treasury redeemed, that is, paid off, $25 billion in T-bills on March 16, and $19 billion on March 18. Two days later, very similar amounts showed up in the RRP data.
Coincidence? Absolutely not. Whoever got stuck with the cash from those paydowns wanted to show something on their books that was an equally safe asset, so they rolled it into these RRPs. They preferred not to buy longer term Treasury paper such as two year notes. They decided not to park it in stocks. And they didn’t have the option of rolling into short term T-bills again, because the Treasury had removed so much paper from the market. So they went to these Fed RRPs.
OK, yes, we’ve seen a tiny bit of activity in these RRPs over the past month since the US Treasury started this gambit of T-bill paydowns. Stuffing cash into the accounts of dealers and banks who had held T-bills. Treasury and Fed policymakers were hoping against hope that those recipients of the cash would buy longer term Treasuries with it, to stop the the crash in bond prices.
It has not worked, because most of the institutions that got that money back, just lent it to the Fed in the form of these overnight repo loans, or they just let it sit in the bank until shorter term bond yields rise enough for them to commit to those. And if there’s so much excess cash around, why are bonds still crashing?
Furthermore, the total amounts in these overnight RRPs aren’t even $30 billion per day, let alone $30 billion per counterparty. On the two days last week were those spikes in usage occurred, there were 25 and 20 counterparties. So the average amount per operation was around $1 billion.
It doesn’t exactly indicate a system awash in liquidity. The only time it shows up at all is on days when when the Treasury has done big bill paydowns.
So why increase the limit to $80 billion? Who is the Fed kidding with this nonsense?
The idea that there’s excess liquidity in the system is a myth. These tiny excesses that do show up are strictly from the T-bill paydowns. And those are temporary.
The Treasury is rapidly using up its massive cash hoard. Not only has it paid off $300 billion in T-bills in the past month, now it’s also spending hand over fist for the stimulus. Its cash has dropped by $600 billion total in the past month. Its cash account is now down to a “measly” $1 trillion. At this rate of spenddown, the Treasury will be out of cash in 6 weeks.
Then that imaginary excess liquidity in the system really will be imaginary. At that point we will face a real liquidity crisis, one that could make last March look like a Sunday School picnic.
So Chet, thanks again for your question. I hope that I’ve answered it to your satisfaction, and I hope that other readers will also be interested enough in ongoing analysis of these issues to check out Liquidity Trader!
Thanks for your support and kind words!
This article appeared on The Wall Street Examiner 22 March 2021.
