Back in July, when we forecast that the Fed's reverse repo would hit $2.5 trillion by year end, we thought that this projection was too aggressive even for a Fed as clueless as this one. Maybe not.
Moments ago, the NY Fed reported that today's overnight repo saw a record $1.604 trillion in usage, the highest number on record distributed among 92 counterparties, also the most on record.
Oh, just $1.6 trillion flowing onto the Fed's books via reverse repos for the last day of the month and the quarter. pic.twitter.com/6rnT0lzmEQ— Michael S. Derby (@michaelsderby) September 30, 2021
Putting this explosion in context:
To be sure, a substantial portion of today's surge was due to month and quarter-end window dressing, and we expect about $200 billion in the total to drop tomorrow once we enter October, however even at $1.4 trillion to say that liquidity conditions are anywhere close to normal would be a joke.
That said, one reason we don't anticipate a continued surge in the rev repo facility is because one of the biggest sources of funding, the Treasury's cash balance, has been almost drained and at $173 billion was the lowest since August 2020. This number will likely drop to just shy of zero by Oct 18 when the debt ceiling D-date hits and the Treasury runs out of cash.
Meanwhile, in other broken market observations, today was the 2nd consecutive Bill auction which saw rate on the 4 Week come higher than that on the 8 Week, typically an unprecedented inversion yet one made possible because the bond market is clearly concerned that the debt ceiling drama will not be resolved on time, or worse.