As expected, today's overnight reverse repo facility usage soared above $300 billion, surging $57BN from $293BN on Wednesday to a whopping $351BN as 48 counterparties parked their reserves with the Fed in exchange for a 0.000% rate.
The surge in usage pushed the total to not only well above the Covid crisis high of $285BN, but was the fifth highest on record!
This is a topic we have been closely following in the past few days...
- Zoltan On The Coming QE Endgame: "Banks Have No More Space For Reserves"
- Fed Alert: Overnight Reverse Repo Usage Soars Above Covid Crisis Highs
... for one reason: the repo market is on the verge of another crisis, with banks sending the Fed a clear SOS signal - they can't take up any more Fed reserves (and there is still about $1 trillion on deck even assuming an accelerated taper).
As repo guru Zoltan Pozsar explained on Monday, "use of the facility has never been this high outside of quarter-end turns, and the fact that the use of the facility is this high on a sunny day mid-quarter means that banks dont have the balance sheet to warehouse any more reserves at current spread levels."
Translation: the Fed is taking Treasurys out of the market through QE purchases and putting them right back in via the RRP
Not only does this impair the proper functioning of the private repo market which has now run out of collateral, as bank are now forced to repo back all reserves they just got from the Fed back to the Fed, it also means that while the Fed still has plenty of assets to monetize courtesy of the Treasury's breakneck debt issuance spree, the banks that end up holding the resulting excess reserves are running out of space and are forced to park these brand new reserves right back with the Fed in the form of the O/N RRP.
In short: the US financial system is starting to groan at every new POMO and every incremental new reserve created by the Fed's QE... and considering that there is at least $1 trillion more in QE to go, things could turn ugly soon.
This, much more than any flip-flopping commentary from the Fed, confirms that we are rapidly approaching D-Day for the Fed when the central bank will no longer be able to conduct $120BN in QE every month - simply because there is no place to park the hundreds of billions in reserves created out of thin air every month - as sooner or later someone will figure out that the Fed is buying up debt only to turn around and repo out the resulting reserves each and every day, amounting to outright debt monetization with potentially calamitous consequences for yields and the US dollar.