WSJ: Cash Flooding Into S-T Markets
The Wall Street Journal writes that, "Cash Is Flooding Into Short-Term Markets Like Never Before. Is That a Bad Sign?." They comment, "An unusual surge of short-term lending by cash-rich companies is raising concerns on Wall Street that a period of unrest may lie ahead. Investors such as money-market funds and banks are parking over $1 trillion in spare cash overnight at the Federal Reserve. That is the most on record since the Fed opened its facility for these reverse repurchase agreements in 2013. The scale of the moves has some analysts warning that the markets for short-term funding are vulnerable to disruption. The cause for this summer's rush into the Fed's reverse repo facility appears to be the central bank's decision in June to nudge up the amount of interest it pays, from 0% to 0.05% -- though usage had already been rising in the spring." The piece explains, "Repurchase agreements, or repos, are the market's main mechanism for moving cash from those who have it to those who need it. The Fed also uses them to influence short-term interest rates; the flood into reverse repo means banks and investors have extra cash and the Fed is vacuuming it up. A higher interest rate should attract more money, but analysts said they were surprised by the speed with which firms moved into reverse repo from other short-term investments such as Treasury bills and commercial paper." The Journal adds, "Worries about short-term funding markets aren't new. The Fed said in its last meeting it would establish two new permanent repo facilities. The decision aims to brace markets against volatility that could hit when the central bank begins tightening financial conditions in coming years. Short-term debt sits at the intersection of markets and the economy, and as such the functioning of these markets is central to the health of the U.S. recovery and the broad advance in prices of stocks, bonds and other assets. While few investors believe repo and reverse repo markets are imminently vulnerable to the kind of breakdown that characterized the 2008 crisis, the sensitivity of these markets to policy changes and economic developments is leaving many portfolio managers on edge. That is doubly so at a time of record U.S. bond issuance, ultralow interest rates and a booming economic recovery that has sent inflation to its highest level in years.... Bill Nelson, chief economist at BPI and a former top Fed staffer, said heavy usage of the reverse repo facility increases the systemic importance of money-market mutual funds, a sector the Fed sees as a financial stability risk. It is a sign that financial markets continue to change and that investors and policy makers must redouble their efforts to keep up."
