RRP declines suggest plenty of liquidity left for bonds and stocks purchases. Any thought on how/why RRP balances could stabilize/grow again (and vacuum liquidity away)?
If we only consider money markets usage of the RRP, there are two ways main that balances can be reduced.
First, is how money markets choose to allocate - whether they buy Tbills, engage in private-sector repo, or use the Fed's RRP. This choice will be driven by economics (which provides the greatest yield), RRP counterparty limits (i.e. there is a maximum amount a single fund can use), and other concerns like duration and counterparty risk.
The second is flows into or out of MMFs by the ultimate investor. So, for example, if people move their money out of a MMF to buy stocks or bonds, it would increase liquidity. There is plenty of "dry powder" theortetically, but it still requires investors to make that decision to pull funds. My guess is that some of the recent drawdown falls into this category (i.e. people buying stocks/bonds in the most recent rally). We saw this back in March as well, where RRP usage ticked down during the rally in stocks, but then went back up as the rally faded. In other words, this process can also work in reverse when things are falling and people shift money out of stocks into MMFs - that is the much more concerning dynamic.
RRP balances have ticked back up in recent days - and aren't too far off from the average over the past 6 months or so.
My guess - and I should do more work to confirm - is that counterparty limits are playing a roll capping the aggregate RRP balances since mid June or so.
I can confirm the signals are just signalling one thing to me: total indecision. Hopium makes the most of these recent rallies tick up - until the bears win and the peaks (ever lower on my complete basket of single indices and even commodities) are trending lower.
All in all it takes one match to light the fire. Which will it be? FOMC, "expectations depressed", a mega cap reducing outlook further or some external factor? Your bet is as good as anyone's.
RRP declines suggest plenty of liquidity left for bonds and stocks purchases. Any thought on how/why RRP balances could stabilize/grow again (and vacuum liquidity away)?
Hi GGH,
If we only consider money markets usage of the RRP, there are two ways main that balances can be reduced.
First, is how money markets choose to allocate - whether they buy Tbills, engage in private-sector repo, or use the Fed's RRP. This choice will be driven by economics (which provides the greatest yield), RRP counterparty limits (i.e. there is a maximum amount a single fund can use), and other concerns like duration and counterparty risk.
The second is flows into or out of MMFs by the ultimate investor. So, for example, if people move their money out of a MMF to buy stocks or bonds, it would increase liquidity. There is plenty of "dry powder" theortetically, but it still requires investors to make that decision to pull funds. My guess is that some of the recent drawdown falls into this category (i.e. people buying stocks/bonds in the most recent rally). We saw this back in March as well, where RRP usage ticked down during the rally in stocks, but then went back up as the rally faded. In other words, this process can also work in reverse when things are falling and people shift money out of stocks into MMFs - that is the much more concerning dynamic.
RRP balances have ticked back up in recent days - and aren't too far off from the average over the past 6 months or so.
My guess - and I should do more work to confirm - is that counterparty limits are playing a roll capping the aggregate RRP balances since mid June or so.
sell offs in fixed income now missing the FED bid so more of a two way market
Absolutely, both in treasuries but even more so MBS
What an article, I love reading you since I always learn something and that is very valuable. Thanks Bear!
Thanks as always Alexr! I will keep them coming for ya
I can confirm the signals are just signalling one thing to me: total indecision. Hopium makes the most of these recent rallies tick up - until the bears win and the peaks (ever lower on my complete basket of single indices and even commodities) are trending lower.
All in all it takes one match to light the fire. Which will it be? FOMC, "expectations depressed", a mega cap reducing outlook further or some external factor? Your bet is as good as anyone's.
Total indecision indeed. And agree on your second sentence - know one knows what the match will be AND when it will strike!
Thank you very much!
Thanks Alex
thanks bear
Thanks theryano!