US banks' reserves steady, assuaging liquidity drainage fears
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[July 22, 2023] By
Davide Barbuscia
NEW YORK (Reuters) - A feared liquidity drainage in the U.S. banking
system as the Treasury refills its coffers has not materialised yet, on
the contrary reserves increased recently, assuaging some concerns the
bond spree could lead to further credit tightening.
The U.S. Treasury started rebuilding its account through T-bills after
the government's debt ceiling was suspended last month. Since early
June, the Treasury General Account at the Fed has increased by about
$460 billion.
Generally, an increase in government borrowing coincides with a decline
in demand for the Fed's overnight reverse repo facility (ON RRP),
through which money market funds lend to the Fed, or with a drop in bank
reserves parked at the central bank.
When banks absorb the new debt issuance they have less money to lend - a
scenario which had some investors worried given ongoing fears of
excessive credit tightening amid higher interest rates.
Federal Reserve data this week, however, showed that in the week ending
on July 19 reserves increased by about $58.5 billion to $3.22 trillion,
while demand for the ON RRP facility declined by $87.3 billion.
"The risk of reserve scarcity in the near-term has receded as more cash
has left the RRP facility," said Gennadiy Goldberg, Head of US Rates
Strategy at TD Securities USA.
"We'll be watching balance sheet runoff in the next several months to
see if that materially changes, but I think the risk has declined as
things stand now," he added.
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The U.S. Federal Reserve Building in
Washington, D.C./File Photo
Demand for the Fed's ON RRP has been declining steadily from $2.3
trillion at the end of May to $1.7 trillion as of Friday.
"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
note this week.
"However, money market funds shifted their allocation out of the RRP
facility into outright purchases of T-bills and private repo
markets," they said.
Fed officials increasingly track the combined total of reserve and
ON RRP balances to get a fuller picture of sector liquidity as they
proceed with reducing the central bank's bond holdings at a targeted
rate of nearly $100 billion a month. Together they now total $5.3
trillion, the lowest in about two years and down by $700 billion
since April with most of that drop coming from ON RRPs, but Fed
officials do not yet sense it is threatening reserve scarcity.
Going forward, Citi analysts said they expected the ON RRP to
continue declining, although at a smaller pace as the Treasury's
financing operations are expected to lose some steam.
(Reporting by Davide Barbuscia; Editing by Dan Burns and Andrea
Ricci)
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