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Zoltan On The Coming QE Endgame: "Banks Have No More Space For Reserves"

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by Tyler Durden
Wednesday, May 19, 2021 - 09:12 AM

One week ago we highlighted a growing challenge facing the US financial system, and especially the Fed: as a result of too many reserves being injected into the system, an extension of the Fed's relentless monetization of $120BN in debt each and every month, not only had we just seen two 0.000% 4-week Bill auction, but overnight funding rates had collapsed with the fed funds rate well below the mid-point of the fed funds target range while the Repo GC rate is at zero; often trading negative. As a result of these zero percent interest rates, billions of dollars of cash were being pushed into the Fed's RRP facility as no rational actor would take on counterparty risk if they could get the exact same rate (0.0%) when transacting with the central bank.

As Curvature's Scott Skyrm put it, "while this is a delightful case of deja vu irony - the Fed is taking Treasurys out of the market through QE purchases and putting them right back in via the RRP - it is also distorting the Repo market, and although the Fed can fix this aberration by hiking the IOER or RRP rates, it has so far refused to do so."

And speaking of reverse repo usage, its use of the facility has never been this high outside of quarter-end turns, or last year's covid disaster.