3 Minutes to Read Reuters, 7 July – According to Credit Suisse analyst Zoltan Pozsar, US banks and money funds are likely to invest more in the Federal Reserve’s reverse repurchase agreement facility in the coming months, which might lower bank deposits and hence lending in money and fixed income markets, causing market disruptions. Since the Fed upped the rate it pays on the loans to 5 basis points from zero last month, money market funds have been borrowing record amounts of Treasuries from the Fed through its reverse repo facility. Investors use the facility to make overnight loans to the Fed guaranteed by Treasuries. Demand has also surged as the Treasury reduces its bill issuance to reduce its cash position before a two-year suspension of the federal debt ceiling expires at the end of this month. Money funds can leave banks with less deposits when they invest more in reverse repos, either by withdrawing cash to make the investments or by rotating out of Treasury bills, forcing other investors to withdraw deposits to invest in bills. Money funds are more likely to use reverse repos if bill rates fall below 5 basis points, making the reverse repo facility more appealing, according to Pozsar in a research released on Wednesday. Meanwhile, as banks continue to build reserves by selling bonds to the Fed and Treasury bill supply decreases, they are expected to invest more in reverse repos. According to Pozsar, demand for reverse repos would likely exceed $1.3 trillion by September, up from roughly $800 billion presently. If bank reserves fall to $3.50 trillion as a result of this increase, banks will have fewer deposits to lend in the foreign exchange swap market, as well as longer-term Treasuries and mortgage-backed securities. This could result in credit disparities in certain markets, resulting in market imbalances. “We’re looking at switching from one marginal lender/buyer to another,” Pozsar explained. According to data from the Federal Reserve, banks had $3.87 trillion in surplus reserves as of April. (Karen Brettell in New York contributed reporting; Alden Bentley and David Gregorio edited the piece.)/n
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