Credit Suisse's Pozsar on RRP Hike
Credit Suisse's Zoltan Pozsar tells us in his latest "Global Money Dispatch," "Since the Fed raised the o/n RRP rate by 5 bps, the use of the o/n RRP facility has increased by $320 billion.... Foreign central banks moved cash from their unremunerated deposit accounts to the o/n foreign repo pool too ..., which suggests that the Fed adjusted the rate on the foreign repo pool as well, presumably to 5 basis points, such that the interest rates on the two reverse repo (RRP) facilities are aligned. So money is on the move, and the generously re-priced RRP facilities will reduce money funds' and foreign central banks' interest in Treasury bills. Others -- with hoards of non-operating deposits at banks -- will have to buy bills instead. The net impact of this will be banks losing deposits and reserves ..., which is what happens when rates on collateral-providing facilities are set above rates that are available in the bill market." He asks, "How will money funds' and central banks' reduced interest in bills play out? Not through sales. The 5 bps hike to the o/n RRP rate came as a surprise, so the bill curve shifted higher a bit more than anticipated. Bills are thus 'underwater' -- which means they can only be sold at a loss -- so money funds won't be selling them now to re-invest the proceeds in the RRP facility at a higher rate. If the rotation from bills to RRPs won't happen quickly, in real time, via sales, it will happen over time and so a bit slower as bills mature. But happen it will." Pozsar adds, "In turn, if the rotation happens through maturities as opposed to outright sales, we can figure out precisely how long it will take for the rotation to run its course, and the amounts that will be involved. In other words, we can confidently gauge how high the use of the o/n RRP could get and, on the flipside, the amount of reserves the banking system would lose to a generously re-priced RRP facility, and whether these flows would be large enough to disrupt rates market dynamics.... Looking at the weighted average maturity of government money fund holdings, the rotation will fully run its course by the end of August, so we are looking at a summer where a trillion of reserves will move from banks to the RRP facility, and where a trillion of deposits will move from deposits to bills."
