Ahead of today's 1:15pm overnight Reverse Repo deadline we asked if today is the day the repo market finallys crack, pushing the amount of reserves parked at the Fed to a new record above $500 billion.
Are we going to hit half a T in RRP today— zerohedge (@zerohedge) May 24, 2021
We were off, but not by too much: on Monday, the Fed revealed that the amount of overnight reserves parked at the Fed rose by another $26BN to $394.9BN (with 54 counteparties) from $369BN (52 counteparties) on Friday, which was the 5th highest in history, up a whopping $186 billion in one week and the highest non-quarter end reverse repo usage ever!
Why does this matter? Three reasons, all of which we explained in extensive detail in "Fed Alert: Overnight Reverse Repo Usage Soars Above Covid Crisis Highs", Repo Crisis Looms: Fed's Reverse Repo Usage Soars To $351BN, Fifth Highest Ever, and Zoltan On The Coming QE Endgame: "Banks Have No More Space For Reserves",
- The Fed is taking Treasurys out of the market through QE purchases and putting them right back in via the RRP
- The heavy use of the o/n RRP facility tells us that foreign banks too are now chock-full of reserves.
- Banks don't have the balance sheet to warehouse any more reserves at current spread levels.
As for the immediate market implications they are even more ominous: either the Fed will have to hike the IOER or rates will soon go negative. Worse, with the Fed still planning to do at least $1 trillion in QE even assuming a December taper, and potentially as much as $2 trillion based on the latest just released Fed "forecast", there is simply no place to park all of these reserves. And while Powell & Co pretend that they can continue business as usual for years to come, the repo market is not only cracking but banks, full to the gills with inert reserves and which increase by $30 billion every week, are on the verge of pulling a Mr Creosote...
... and balking at even a penny of additional liquidity. How the Fed will continue to monetize debt then, when the repo system is now out of collateral, is anyone's guess.