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US Bank Reserves Remain Stable, Allaying Concerns About Liquidity Loss

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As the Treasury restocks its coffers, an anticipated liquidity outflow in the U.S. financial sector has not yet occurred; rather, reserves have lately climbed, allaying some fears the bond-buying binge may result in more credit restriction.

After the government’s debt ceiling was postponed last month, the U.S. Treasury began reestablishing its account using T-bills. The Fed’s Treasury General Account has grown by nearly $460 billion since early June.

Federal Reserve Figures

The demand for the Fed’s overnight reverse repo facility (ON RRP), through which money market funds lend to the Fed, tends to diminish as government borrowing rises, as does the amount of bank reserves kept on deposit at the central bank.

Given persistent concerns about excessive credit tightening despite increasing interest rates, several investors were concerned when banks absorbed the additional debt issue and had less money to lend.

However, according to Federal Reserve figures released this week, while demand for the ON RRP facility fell by $87.3 billion, reserves rose by around $58.5 billion to $3.22 trillion for the week ending on July 19.

As more money has left the RRP facility, the likelihood of reserve shortages in the near future has decreased, according to Gennadiy Goldberg, Head of US Rates Strategy at TD Securities USA.

In the coming months, he said, “we’ll be watching balance sheet runoff to see if that materially changes, but I think the risk has declined as things stand now.” From $2.3 trillion at the end of May to $1.7 trillion as of Friday, demand for the Fed’s ON RRP has been slowly falling.

Federal Open Market Committee

Us Bank

Source: tvguide

“At the end of May, we had expected more of the drain to come out of bank reserves, as we expected money market funds to keep their money in ON RRP due to still-hawkish Fed messaging at the June FOMC (Federal Open Market Committee) meeting,” Citi analysts said in a report last week.

They said that money market funds have switched their allocation from the RRP facility to direct purchases of T-bills and private repo markets.

Fed policymakers are continuing to reduce the central bank’s bond holdings at a planned rate of almost $100 billion per month while keeping a closer eye on the combined total of reserve and ON RRP balances to obtain a more complete picture of sector liquidity. Together, they now stand at $5.3 trillion, the lowest level in roughly two years and down $700 billion since April, with the majority of that decline coming from ON RRPs. However, according to Fed officials, reserve shortage is not now in danger.

Future ON RRP declines are anticipated, according to Citi analysts, but at a slower rate as the Treasury’s funding activities are anticipated to slow down.

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