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Reverse Repos Hit a New Record High Today, It’s Tapering With a Twist

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24 comments on Reverse Repos Hit a New Record High Today, It’s Tapering With a Twist

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Given that reverse repos are reverse of QE, the Fed has actually reduced its balance sheet over time.

On April 5, 2021, Reverse Repos were $3 billion. On April 4, 2021 they were $0. Historically, some of the $0 numbers are bogus, typically a holiday, but April 4 is confirmed by the small positive number on the 5th.

While expanding its balance sheet, the Fed has simultaneously been reducing it. Effectively, QE needs to be subtracted from the Fed’s balance sheet.

Fed’s Balance Sheet 

Let’s Twist Again

The Fed’s balance sheet has effectively been shrinking since the surge in reverse repos started. 

What’s happening is a Twist operation, while the Fed has effectively been reducing its balance sheet it has been simultaneously been adding to duration. 

The Fed added assets at the long end (long  duration treasuries and mortgage backed securities giving the housing market a huge boost it does not need) while subtracting at the short end in attempts to not break the money market mutual funds.

If the Fed did not do this twist operation rates would go negative at the short end. 

“Working as Designed”

I discussed this before including the Twist aspect.

Down the Rabbit Hole 

Please recall my July 1 post Down the Rabbit Hole in Reverse Repos, What is the Fed Doing?

I discussed the Twist aspect, noting and answering “The Fed just unwound over 8 months of QE. What’s going on?“

I expect this kind of manipulation will continue, if and when the Fed ever gets around to hiking rates.

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Mike Shedlock

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Casual_Observer2020
Casual_Observer2020
2 years ago
The Fed has many tricks up its sleeves  yet. Last week I said they would taper with one hand and buy with the other. This is effectively the path Japan went down years ago. We will bounce around ZIRP. Wage gains have masked some of the problems. The reason  the Fed has chosen thid path is they would rather have this problem than a deflationary bust like 2009. Pension funds also avoid worse problems in a deflationary crash. I predict a lot of them won’t be adjusted for real inflation and will just use some magic formula. The Fed does not want to repeat 2008/2009 ever again so instead we will go down the path of least resistance. 
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Tony Bennett
Tony Bennett
2 years ago
“It is driven by the Fed

If the Fed did not have interest rates at roughly 0% while doing massive QE, rates would be negative.”

…
A lot to unwrap here.  Yes, rates would be negative without RR, but I agree with Michael cause due to “market forces” (of which, Federal Reserve is one force).  Other central banks are doing same … and global liquidity seeking ANY (safe)  positive return.  Emerging Markets (periphery) are beginning to circle the drain and liquidity leaving  to safety of Developed Markets (core).  Treasury playing a role in issuance of debt by extending average maturity…. leading to shortage of t-bills.  Per latest (September) average length of treasury debt has risen from 56 months (September 2020) to 66 months.  Concerted effort to push debt out on curve.  It might surprise many here but in that time space treasuries outstanding of maturity less than a year more than a $trillion LESS than last year.  So inversion talk I don’t pay a lot of attention to since not comparing apples to apples.  One reason for Twist is that buying on the long end of curve generates more income for Federal Reserve, this income (after taking out expenses) is remitted back to Treasury.  Higher the income, less the deficit.
All along I’ve stated US will see NIRP – whether Federal Reserve wants it or not – due to “market forces”.
My call is that 10yr yield will flirt with going negative at SOME point during the Great Unwind.
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Scooot
Scooot
2 years ago
Reply to  Tony Bennett
“One reason for Twist is that buying on the long end of curve generates more income for Federal Reserve, this income (after taking out expenses) is remitted back to Treasury.”
This is true but it’s not really income, it’s just reducing the cost of Treasury issuance to that of short term rates. Any upward shift in short term rates will be a real cost, as will be any new treasury issuance when QE has ceased. Maybe these extra costs would weigh on their minds if they choose to fight high inflation.
If forced to make a call mine is a 10 year of over 2% by say end of next June. 🙂
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Tony Bennett
Tony Bennett
2 years ago
Reply to  Scooot
“Any upward shift in short term rates will be a real cost, as will be any new treasury issuance when QE has ceased.”
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Shift upward?  Perhaps, but only after the unwind.  Reverse Repo is fighting current “market forces”  that want to take short term yield negative… and those forces not changing anytime soon.  I’m skeptical of Federal Reserve making it to end of QE, but if they do?  No matter.  Yields will still drop.  Why?  The stoopid, er, stock market will lose its security blanket of Federal Reserve Put and will drop.  Driving equity money into bonds.
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Scooot
Scooot
2 years ago
Reply to  Tony Bennett
By upward shift I meant rate rises so wrong phrase.
If the stock market falls, equities will still be owned by someone, they’ll just be worth less. I suspect they’ll be an effort to switch into bonds but it can’t happen in aggregate, only for a lucky few. In the meantime a $120 billion worth of demand every month at the lowest rates in history will have disappeared. Maybe those institutions who have been selling to the Fed will be happy with their 1.5% yield to maturity for a while longer. Or they won’t buy in advance of Fed demand.
Anyway, nothings certain these days so you might be right, but I’m a bond bear medium term. 
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StukiMoi
StukiMoi
2 years ago
While watching illiterate, idiot-appointed shamen stumble around performing different raindance moves with more intelligent, productive and useful peoples’ livelihoods, may have some macabre entertainment value; it’s “other people’s livelihoods” which is the point. Not the exact, arbitrary, dance moves the illiterates happen to be performing at any given time.
None of what any of these illiterate mediocrities do, has any basis in economics. Nor any basis in even the most elementary logic. None serve any productive purpose. None of those involved are capable of neither understanding, doing, producing nor adding anything of value whatsoever. They simply lack anything even resembling the necessary aptitude and ability. So instead, all they do is try to act cute and get attention by acting up like little children. While attempting to use what they believe are “grownup words,” in order to fake being something more than they are.
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killben
killben
2 years ago
“I expect this kind of manipulation will continue, if and when the Fed ever gets around to hiking rates.”
You bet! How else can the Fed keep the markets afloat?
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Christoball
Christoball
2 years ago
Is a Reverse Repo like a gift card that can only be spent at the Fed???? Just trying to wrap my head around this????
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Mish
Mish
2 years ago
Reply to  Christoball
In a Repo – The Fed gives banks cash (forces them to take actually because the banks have no choice) In return the Fed gets a security – typically a US treasury or Agency. The security is an asset to the Fed. Banks cannot really do much with this cash. It plays no role in bank lending. It is an interest rate control mechanism by the Fed. QE is a repo but longer duration. 
A reverse repo is the opposite. The Fed takes cash (a liability to the Fed ) and gives banks a security, almost always overnight. Reverse repos are voluntary on the part of financial institutions.
The demand for reverse repos is high
Banks and especially Money market have no use for the cash the Fed is cramming down their throats. It’s free money to the banks because they park the money back at the Fed thanks to Bernanke requesting from Congress and getting the ability to paying interest on reserves. The Fed eliminated required reserves in 2020 so all reserves are excess reserves. 
Yes, you read that correctly, there are no reserves on the balance you think is in your checking account. Your money isn’t there because it’s elsewhere collecting interest, every penny of it.
However, the Fed did not use to pay nonbanks like Money Markets interest on reserves parked at the fed. Now the Fed pays nonbanks but at a lesser rate than nonbanks.
The whole setup is indeed hard to grasp. 
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Eddie_T
Eddie_T
2 years ago
OT…..I highly recommend this YT commentary from a very sensible British guy on several of the day’s major issues……Mallen Baker on Omicron, the false narrative of Biden and his progressive posse regarding inflation……climate change, energy policy in Europe…..really a good podcast.
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Scooot
Scooot
2 years ago
Reply to  Eddie_T
Wow, a good piece of balanced reporting. Thanks for this. 
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thimk
thimk
2 years ago
yes it is painfully evident that perhaps we will be in a low interest rate environment ad infinitum. Inflation or not . recession or boom .   Pandemic or not. I guess that’s show biz 
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Bam_Man
Bam_Man
2 years ago
Reply to  thimk
It’s called “The Fiat End Game”.
Venezuela got there quite a few years ago. Their inflation rate is 2,700% while the Banco Central de Venezuela’s overnight benchmark rate is 53%.
I don’t think anyone cares what their “Dot Plots” are or what they say about “rate hikes” at this point.
Coming soon to a Banana Republic near you.
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vanderlyn
vanderlyn
2 years ago
honest question.   is the fed borrowing long term and lending short term?   and what happens when the economic cycle moves from growth to recession,  as she does every 5 to 10 years in world history?
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Scooot
Scooot
2 years ago
Reply to  vanderlyn
By lending bonds via reverse repos they’re borrowing short term and by buying bonds they’re lending long term.  
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Eddie_T
Eddie_T
2 years ago
So my question is……does the this “taper effect” of the reverse repos actually contribute to yield curve flattening? I mean, if it supports the short end of the curve….?  And if so, is that possibly giving a false signal for an impending recession?
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Scooot
Scooot
2 years ago
Reply to  Eddie_T
If the Fed didn’t offer to lend treasuries via reverse repos I think the Commercial Banks would just have to place the funds on deposit with the Fed at whatever rate they offered instead. 
So yes the curve would be steeper without the Fed.
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Mish
Mish
2 years ago
Reply to  Scooot
The curve would surely be steeper 
But without the Reverse Repos the overnight lending ratio would go negative
And the Fed actually had to authorize paying non-banks (e.g. money market funds) interest on money parked at the Fed or money market funds would be charging money to park it.
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Scooot
Scooot
2 years ago
Reply to  Mish
Did you mean the overnight lending rate? If so surely it would only go negative if the Fed let it by not paying a high enough rate on overnight deposits placed with the Fed, or have I got that wrong? 
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Mish
Mish
2 years ago
Reply to  Scooot
I do mean the overnight lending rate but also money market rates.
The Fed’s balance sheet expansion is so great that overnight rates would be negative without reverse repos paying interest. 
Most money market funds are extremely short term. Add in expenses of running the fund and they would have to charge for deposits.
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Scooot
Scooot
2 years ago
Reply to  Mish
Ok got it, thanks for the explanation. 1 month, 3 month 6 month deposits etc as opposed to the same term for repos. 
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Eddie_T
Eddie_T
2 years ago
Reply to  Mish
Thanks to both of you very much.
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Scooot
Scooot
2 years ago
Reply to  Eddie_T
Eddie, I found this for info, which goes into Mish’s explanation in more detail.
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Jackula
Jackula
2 years ago
Reply to  Mish
Interesting all the creative measures taken to keep the capital markets from breaking with all of the FED’s monkeying around, thanks for the insight
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