The Federal Reserve Bank of New York's Liberty Street Economics blog published a piece entitled, "Dropping Like a Stone: ON RRP Take-up in the Second Half of 2023." It explains, "Take-up at the Overnight Reverse Repo Facility (ON RRP) has halved over the past six months, declining by more than $1 trillion since June 2023. This steady decrease follows a rapid increase from close to zero in early 2021 to $2.2 trillion in December 2022, and a period of relatively stable balances during the first half of 2023. In this post, we interpret the recent drop in ON RRP take-up through the lens of the channels that we identify in our recent Staff Report as driving its initial increase." (Note: Thanks once again to those of you attended our Money Fund University in Jersey City earlier this week! Attendees and Crane Data subscribers may access the materials via our "Money Fund University 2023 Download Center.")
The update tells us, "As the Federal Reserve expanded its balance sheet in response to the COVID-19 pandemic, it increased the supply of reserves to the banking system and, as a result, banks' balance sheets also grew. Reserves increased from $1.6 trillion -- or 9 percent of banks assets -- in January 2020 to $3.2 trillion -- or 16 percent of bank assets -- over the following three months, reaching a historical maximum of 19 percent of banks' assets in September 2021.... [B]ank assets also grew from $18 trillion in January of 2020 to $20 trillion in April 2020, and continued to increase to $23 trillion in May 2023."
It continues, "As banks' balance sheets expand, regulatory ratios -- such as the supplementary leverage ratio (SLR) -- are likely to become tighter for some institutions. Banks react to increased balance-sheet costs by pushing some of their deposits toward the money market fund (MMF) industry -- for instance, by lowering the rate paid on bank deposits -- and reducing their demand for short-term debt. As we explain in our paper, both effects are likely to have boosted ON RRP take-up during March 2021 – May 2023, as most MMFs are eligible to invest in the ON RRP and do so especially when alternative investment options, such as banks' wholesale short-term debt -- including repos by dealers affiliated with a bank holding company -- dwindle."
The brief adds, "Likely, these effects have subsided relative to 2022. Indeed, since June 2023, bank assets have hovered around $23 trillion, slightly below their March 2023 peak.... Consistent with a decrease in banks' balance-sheet costs (and an increase in the supply of bank debt), the interest rates at which banks and broker dealers borrow via overnight Treasury-backed repos have increased since the fourth quarter of 2022 and are now a few basis points above the ON RRP rate. This positive rate differential pushes MMFs away from investing at the ON RRP facility and into private repos."
It explains, "Monetary policy can affect ON RRP take-up by MMFs in two ways. First, the interest-rate pass-through of MMF shares is higher than that of bank deposits; as a result, the size of the MMF industry comoves with the monetary policy cycle as investors switch from bank deposits to MMF shares when the policy rate increases. Though the assets of the MMF industry are at an all-time high, the pace of the increase has somewhat decreased recently, consistent with a slower pace of monetary policy tightening; moreover, the share of MMF assets managed by government funds -- the ones most likely to invest in the ON RRP -- has decreased since June 2022 by 7 percentage points."
The blog continues, "Second, monetary policy can affect MMFs' take-up at the ON RRP also through its effect on interest-rate uncertainty. Higher uncertainty leads MMFs to rebalance their portfolios toward investments with shorter duration; the ON RRP is one such investment as it is overnight. Indeed, interest rate uncertainty -- as measured by the MOVE index -- had increased substantially during the latest tightening cycle, raising from 57.3 in May 2021 to 136 in May 2023. Recently, however, the increase has been partially reversed. Indeed, the average level of the MOVE was 125.6 in the first half of 2023 but declined to 117.3 in the second half of the year."
Finally, it says, "A third driver of ON RRP take-up is the supply of T-bills. The Federal Government has expanded the supply of T-bills dramatically in 2023: T-bills outstanding increased from $3.7 trillion at the end of 2022 to $5.3 trillion at the end of September 2023, with a $1.3 trillion increase since June. As the supply of T-bills grows, the investment options of MMFs -- and especially of government funds, which represent 83 percent of the industry and can only invest in short-term government debt and repos backed by government debt—expand and, as a result, their investment in the ON RRP dwindles. In our staff report, we estimate that a $100 billion increase in the amount of T-bill issuance reduces the proportion of ON RRP investment in a government-MMF portfolio by 2.3 percentage points, relative to that in a prime-MMF portfolio; since average monthly T-bill issuance went from $1.12 trillion in the period from 2022:Q1-2023:Q1 to $1.53 trillion in 2023:Q2-2023:Q3, this effect on portfolio rebalancing amounts to an additional decrease in ON RRP investment of roughly $350 billion."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Wednesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of December 15) includes Holdings information from 69 money funds (up 16 from two weeks ago), or $3.052 trillion (up from $2.527 trillion) of the $6.255 trillion in total money fund assets (or 48.8%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.)
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.287 trillion (up from $1.051 trillion two weeks ago), or 42.2%; Treasuries totaling $1.242 billion (up from $993.9 billion two weeks ago), or 40.7%, and Government Agency securities totaling $266.4 billion (up from $243.1 billion), or 8.7%. Commercial Paper (CP) totaled $91.2 billion (up from two weeks ago at $84.8 billion), or 3.0%. Certificates of Deposit (CDs) totaled $74.6 billion (up from $68.7 billion two weeks ago), or 2.4%. The Other category accounted for $63.1 billion or 2.1%, while VRDNs accounted for $28.9 billion, or 0.9%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.242 trillion (40.7% of total holdings), Fixed Income Clearing Corp with $275.3B (9.0%), the Federal Reserve Bank of New York with $267.3 billion (8.8%), Federal Home Loan Bank with $205.1B (6.7%), RBC with $79.7B (2.6%), Citi with $72.1B (2.4%), JP Morgan with $67.1B (2.2%), Goldman Sachs with $66.3B (2.2%), BNP Paribas with $54.0B (1.8%) and Federal Farm Credit Bank with $51.5B (1.7%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($267.8B), Goldman Sachs FS Govt ($222.2B), Fidelity Inv MM: Govt Port ($183.0B), JPMorgan 100% US Treas MMkt ($182.9B), Morgan Stanley Inst Liq Govt ($143.7B), BlackRock Lq FedFund ($141.1B), State Street Inst US Govt ($139.8B), Allspring Govt MM ($119.7B), Fidelity Inv MM: MM Port ($118.2B) and Dreyfus Govt Cash Mgmt ($112.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
