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Cailianshe News, August 7 (Editor: Xiaoxiang)According to data from the New York Fed, the Federal Reserve's use of reverse repurchase tools fell below $300 billion for the first time since mid-2021 on Tuesday.

On Tuesday, a total of 60 participants deposited $292 billion in the Fed's overnight reverse repurchase agreement (RRP) facility. Compared with the record high of $2.554 trillion on December 30, 2022, the current figure is only about one-tenth of that time.

The Federal Reserve's overnight reverse repurchase tool can be understood as a reservoir of idle funds of non-bank institutions. Banks, government-backed enterprises and money market mutual funds used to deposit cash here to earn interest (the current RRP rate is 5.3%), and it can also serve as a buffer for bank reserves.

Market participants are paying close attention to the usage of RRP recently.

Against the backdrop of recent financial market turmoil,Some on Wall Street have warned that falling RRP use could be a sign that excess liquidity has been removed from the financial system and that bank reserve balances are not as ample as central bank policymakers believe.

The Fed began slowing the pace of its balance sheet reduction in June, reducing the amount of bonds it holds to maturity without reinvesting each month, thereby easing potential pressure on money market interest rates.

Led by Teresa HoJPMorganThe strategists said last month that the Fed could continue to shrink its balance sheet until the end of this year, with RRP expected to be slightly below $300 billion and bank reserves still reaching $3.1 trillion.

but,The recent downward trend in RRP usage seems to be worthy of people's vigilance. Including the decline on Tuesday, the usage of RRP tools has now fallen for four consecutive days - the cumulative decline in four days has reached more than US$120 billion, and it has also refreshed the lowest level in more than three years since May 2021 for two consecutive days.

Usage of the tool has been declining since the second half of July, almost at the start of the turmoil in financial markets.

Some assets flow into the overnight repo market

At the same time, some industry insiders also said that many RRP trading parties may be withdrawing funds from the Fed's reverse repo facility and pouring into the higher-interest overnight repo market, where financial companies such as banks and hedge funds borrow short-term cash against Treasury bonds or other debt securities.

“When investors sell risk assets, they typically move into cash, and cash typically gets funneled into the repo market,” said Scott Skyrm, executive vice president of fixed income and repo at New York broker-dealer Curvature Securities.

Lou Crandall, chief economist at money market research firm Wrightson, pointed out that market financing demand may have increased after the sharp rise in U.S. Treasuries last Friday, which prompted money funds to put cash into the private repurchase market.

He believes that the turn to the repo market rather than the Fed's reverse repo facility amid the stock market crash may also be the reason for the slightly weaker repo rates on Monday, and the lower repo rates may continue throughout the week.