RRP No Collateral Coincidences As Bills Quirk, Too

So much going on this week in the bond market, it actually overshadowed the ridiculous noise coming from the Fed’s reverse repo. Some, maybe too many, want to make a huge deal out of this RRP if only because the numbers associated with it have gotten so big. To end Q2 2021, financial counterparties “lent” just about $1 trillion to the Fed.

Holy cow! A trillion! There’s way too much money!


The RRP, especially around its more informative margins, has little to do with too much money and almost everything to do with still too little collateral. The correlation with anti-reflation from bills to notes to bonds leaves little other interpretation. The latter matters so much more than the former, as proved so many times since Bear Stearns I couldn’t easily list them all (but I’ll note October 15, 2014 and May 29, 2018 because they were especially noteworthy).

And if you have followed the RRP’s saga especially in its first week of Q3, you’ve already noticed that, yes, at the margins the RRP seems to rise and fall with the rise and fall in bill yields. While there is absolutely a glut of bank reserves (not to be confused with effective modern money) which has pushed financial counterparty demand for this Fed-sponsored outlet, that’s far from the only factor determining usage.

To begin with, the raw data: the highest balance was recorded right on June 30, or quarter-end which sadly is entirely consistent with reporting period rhythms whereby it’s long since standard practice for banks and now non-banks, too, to hide as much risky activities as they can possibly get away with not reporting. Big jump in these “safe” classes at each quarterly interval, of which RRP qualifies.

Notice, however, that the RRP balance then drops not just way down from the June 30 top but even in comparison to late June before quarter-end. The average was $808 billion the final week of June (not including the 30th) but was only $772 billion over this past week. While $36 billion isn’t a huge difference, why isn’t it still going up (as some in the media have contested)?

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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