With the debt ceiling imminent, the Fed’s reverse repo transaction volume reached a record $1 trillion Reuters

Authors: Gertrude Chavez-Dreyfuss and Jonnelle Marte

NEW YORK (Reuters)-As investors and financial institutions continue to inject cash into the overnight window, the reverse repurchase transaction volume of the US Federal Reserve surpassed $1 trillion for the first time on Friday.

As the U.S. debt ceiling is imminent and the Treasury Department reduces its bill issuance, financial companies have difficulty finding places to invest in excess cash, and demand for the Fed’s reverse repurchase tool has surged.

The financial system has about 4 trillion U.S. dollars in reserves, partly due to the U.S. central bank’s asset purchases, the decline in the issuance of Treasury bills, and the rapid decline in the government’s reserves of funds at the Federal Reserve. Since last fall, the U.S. Treasury General Account (TGA) has decreased by more than $1 trillion.

The Federal Reserve stated that the company deposited $1.04 trillion overnight in a reverse repo tool on Friday. There are 86 bidders, including money market funds and other qualified financial institutions.

After the Federal Reserve raised the interest rate for reverse repurchase agreements from 0% to 0.05%, the volume of reverse repurchase instruments soared further last month as part of a technical adjustment to prevent the effective federal funds rate from falling too low.

The Ministry of Finance had to reduce its cash balance before July 31, when the country’s debt ceiling will come into effect again. This will push more cash to an already liquid financial system.

The Ministry of Finance stated in May https://home.treasury.gov/news/press-releases/jy0164 that its goal is to have a cash balance of US$450 billion by July 31. The data as of Wednesday https://fsapps.fiscal.treasury.gov/dts/files/21072800.pdf is $537 billion.

Gennadiy Goldberg, senior U.S. interest rate strategist at TD Securities, said: “This forces them to pay the billing supply to reach this number, which may be faster than they want.”

Analysts said that as foreign exchange reserves are still high, the demand for the Fed’s reverse repurchase tools may continue to rise. Scott Skyrm, executive vice president of fixed income and repurchase at Curvature Securities, estimates that by the end of this year, the use of the program may exceed $2 trillion.

Fed Chairman Jerome Powell said earlier this week that the plan is working as expected, helping to set a lower limit for short-term interest rates and ensuring that interest rates remain within the Fed’s target range.