The Federal Reserves debt monetization program is leaving banks flush with reserves. (When the Fed monetizes debt, it buys the debt from banks, which increases their reserves with the central bank.) The only thing the banks can do with the reserves is lend them back to the Fed in the repo market. From Tyler Durden at zerohedge.com:
In today’s FOMC Minutes there was a brief section that received little focus amid the broader analysis of the Fed’s tapering, inflation language, yet which could be far more important in coming weeks in light of the violent move higher in overnight reverse repo usage.
This is what the Fed said in its discussion of money market rates and the Fed’s balance sheet:
Reserve balances increased further this intermeeting period to a record level of $3.9 trillion. The effective federal funds rate was steady at 7 basis points. However, amid ongoing strong demand for safe short-term investments and reduced Treasury bill supply, the Secured Overnight Financing Rate (SOFR) stood at 1 basis point throughout the period. The overnight reverse repurchase agreement (ON RRP) facility continued to effectively support policy implementation, and take-up peaked at more than $100 billion. A modest amount of trading in overnight repurchase agreement (repo) markets occurred at negative rates, although this development appeared to largely reflect technical factors. The SOMA manager noted that downward pressure on overnight rates in coming months could result in conditions that warrant consideration of a modest adjustment to administered rates and could ultimately lead to a greater share of Federal Reserve balance sheet expansion being channeled into ON RRP and other Federal Reserve liabilities. Although few survey respondents expected an adjustment to administered rates at the current meeting, more than half expected an adjustment by the end of the June FOMC meeting.“
This language confirms what we said last night when we discussed the spike in overnight reverse repo usage as part of the coming QE endgame…
… and where we quoted from former Fed staffer Zoltan Pozsar, who warned that “The heavy use of the o/n RRP facility tells us that foreign banks too are now chock-full of reserves.”