Once upon a time, back in 2010 and 2011, the Fed's Primary Dealers would engage in a furious game of window dressing at the end of every quarter, when they would sell their risky assets, and convert them into cash to appears idiot accountants and even greater idiot regulators, a phenomenon which could be followed on the Fed's Primary Dealer asset holding page, and which we would showcase periodically such as on the chart below from October 2011.
Well, in the intervening period, when the Fed managed to soak up another $1.3 trillion in "high quality collateral", and replace it with fungible reserves (used exclusively as collateral for marginable risk-on positions) courtesy of QEternity, something changed. Whether it is a regulatory matter, or simply liquidity preference, but holding Treasury paper has become more attractive to US financial firms (mostly Primary Dealers) than holding cash.
Enter the Fed's recently announced (read more here) Fixed-Rate Reverse Repo facility, which earlier today saw its greatest use to date in history, when a record $95 billion in Treasury paper was repoed out to the street for a 3 day term, at an 0.03% annual rate. Since there were 68 bidders in the operation, the average participant had an extra $1.4 billion in cash lying around to give to the Fed in exchange for holding Treasurys into year end.
So for all those wondering about all those sophisticated technical and fundamental reasons why the Fed is pushing hard on the Reverse Repo pedal, and how this is indicative of the Fed's far-sighted approach of how to best executed a tightening when the time comes, turns out the FRRR facility was nothing more than yet another way that the Fed allows banks to paint their books for t month, quarter and year end purposes.
But while the Fed enabling its real owners is nothing new, what is perhaps more troubling is that earlier today there was $95 billion in excess liquidity floating around. With a B.
So yes, keep repeating that there is no liquidity bubble (which incidentally, is about $2.5 trillion or the size of US banks' excess deposits).