Fed turns on pension faucet overnight as Wall Street watches the barrel of the fight against the US debt ceiling
A much larger overnight parking spot for Wall Street liquidity is about to open, as market participants wait for the shock of the US debt ceiling to end.
As of Thursday, banks, money market funds and other financial companies can park up to $ 160 billion overnight in the Federal Reserve Bank of New York’s Repurchase Program (RRP). , or double what was authorized under the previous ceiling.
“Investors, such as money market funds, can use the RRP as a ‘safe haven’ for money,” Barclays interest rate strategist Joseph Abate wrote in a note Wednesday.
He also noted (with a graph) that before the debt ceiling expiration date of November 3, 2015, “the balances of the Fed’s guarantee program increased”, exceeding their average by $ 90 billion.
Markets were inundated with money as the Federal Reserve and Washington lawmakers inundated the U.S. economy during the pandemic with billions of dollars in stimulus.
The Fed’s reverse repo program, which pays users 5 basis points, has become a popular place for Wall Street to park money overnight, especially with the downturn in the treasury market. and the suspension of the debt ceiling expiring earlier this summer.
Now, with a potential government shutdown looming in October without a debt ceiling deal, investors have started to focus on a range of issues that could rock markets in the last three months of the year.
Read: Why the struggle to limit the debt makes Washington a stock market “joker”
Jim Vogel, an interest rate strategist at FHN Financial in Memphis, said the Fed’s larger counterparty ceilings can be partly attributed to the debt ceiling limit, but also to “the uncertainty of the fiscal policy ”which could continue to disrupt or persist after the bond market returns. in size, once the deadlock on the debt ceiling has been resolved.
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“Finally, they need to start thinking about year-end volume,” Vogel told MarketWatch, speaking of the cash crunch and volatility that can arise at year-end.
Demand for the Fed facility hit a new record high of $ 1.28 trillion on Wednesday, according to Fed data.
To meet the anticipated demand created by debt ceiling anxiety, the Fed doubled the RRP counterparty size ceiling – to $ 160 billion – at this week’s FOMC meeting “Abate wrote.
“In addition to being a safe harbor, liquidity held in the RRP is readily available so that monetary funds can be redeployed to the note market once the debt ceiling is lifted.”
On Wednesday, they posted their best daily gain in about two months, after Federal Reserve Chairman Jerome Powell and other rate-setting officials chose not to start removing his pandemic support from markets yet. . Yields on the 10-year Treasury TMUBMUSD10Y,
rose less than a basis point to 1.332%.