BANKS AND FUNDS STASH RECORD $2TN OVERNIGHT AT FED FACILITY / THE FINANCIAL TIMES

Banks and funds stash record $2tn overnight at Fed facility

Investors in search of safe assets flock to overnight reverse repo market

Kate Duguid and Eric Platt in New York

The surge of interest in the Fed’s overnight facility has been exacerbated by a decline in issuance of Treasury bills © Andrew Harnik/AP

Money market funds and banks parked a record $2.04tn at the Federal Reserve on Monday, underscoring the demand for safe-haven investments as interest rates rise and financial markets whipsaw.

The figures disclosed by the Federal Reserve Bank of New York marked the first time that more than $2tn had been tucked away in the Fed’s overnight reverse repurchase facility.

While surging demand has in the past been seen as a potential sign of looming problems, it has not raised similar concerns this time, as funds and banks tapping the facility have few other appealing options to store their excess cash.

Federal stimulus boosted the checking and savings accounts of millions of Americans, while many companies built up war chests during the coronavirus pandemic. 

Some of that cash is now stashed in safe, liquid assets in money market funds and bank accounts.

There was just under $4.5tn sitting in money market funds last week, according to the Investment Company Institute. 

While that is down from a record $4.8tn in the early months of the pandemic, it remains far above the levels in the preceding years.

Ultra-safe and easily traded Treasury bills are typically the go-to investment for money market funds.

The surge of interest in the Fed’s overnight facility, which acts as an investment of last resort, has been exacerbated by a decline in issuance of short-dated government debt, known as Treasury bills, because of a drop-off in government spending.

In the first four months of the year, the US Treasury issued $4.3tn worth of bills, down roughly $660bn from the same period last year, according to data from Sifma, a US securities market association.

The decline in the supply of Treasury bills has meant funds are competing for fewer assets, pushing prices up and prompting fund managers to look for alternatives. 

That has driven many to the Fed’s RRP facility, including 94 counterparties on Monday. 

The overnight facility will pay a rate of 0.8 per cent.

“The trend higher in RRP is due to insufficient front-end supply and money funds getting displaced out of front-end bills. 

They are too rich,” said Mark Cabana, head of US rates strategy at Bank of America.

The yield on Treasury bills is also higher than the return from money market funds, so some investors looking for a place to stash cash are bypassing money funds altogether, said Joseph Abate, a strategist at Barclays.

That decline in supply is expected to persist in the coming months, suggesting price pressures will continue. 

Barclays estimates that Treasury bill issuance will have dropped 15 per cent in the six months through September 2022.