No, I think this particular dislocation can happen because of short term supply/demand dynamics. If a ton of people decide to pile into Tbills all at once, it can push that rate below the RRP award rate, because there market hasn't yet "balanced it out" yet. Though if you look at 1mo TBill vs. RRP award rate over the past year you will s…
No, I think this particular dislocation can happen because of short term supply/demand dynamics. If a ton of people decide to pile into Tbills all at once, it can push that rate below the RRP award rate, because there market hasn't yet "balanced it out" yet. Though if you look at 1mo TBill vs. RRP award rate over the past year you will see that the two rise in tandem.
The problem now is that there is a big economic incentive for MMFs to allocate more to the RRP, which could exacerbate the liquidity dynamics. This doesn't happen overnight, and some counterparties may already be at their $160bn limit, but its not a good thing directionally.
Yes - currently there is a major spread between short term Tbill rates and the RRP so there is economic incentive.
The other incentive of course is counterparty - there is no better counterparty than the Fed - when combined with daily liquidity, it is the best alternative to a MMF, if prices are equal across similar investments.
No, I think this particular dislocation can happen because of short term supply/demand dynamics. If a ton of people decide to pile into Tbills all at once, it can push that rate below the RRP award rate, because there market hasn't yet "balanced it out" yet. Though if you look at 1mo TBill vs. RRP award rate over the past year you will see that the two rise in tandem.
The problem now is that there is a big economic incentive for MMFs to allocate more to the RRP, which could exacerbate the liquidity dynamics. This doesn't happen overnight, and some counterparties may already be at their $160bn limit, but its not a good thing directionally.
That makes sense, thanks very much.
What are these big economic incentives for MMFs to allocate in RRP over short term TBills? Do you mean the 50bps or so of interest rate spread?
Yes - currently there is a major spread between short term Tbill rates and the RRP so there is economic incentive.
The other incentive of course is counterparty - there is no better counterparty than the Fed - when combined with daily liquidity, it is the best alternative to a MMF, if prices are equal across similar investments.