NVIDIA Stock – Banks could cut loans in rates/fx swaps as reverse repos grow -Credit Suisse analyst
By Karen Brettell
July 7 (Reuters) – U.S. banks and money funds are likely to invest more in the Federal Reserve’s reverse repurchase agreement facility in the coming months, which could reduce bank deposits and thus lending in money and fixed income markets, creating market disturbances, according to Credit Suisse analyst Zoltan Pozsar.
Money market funds have been borrowing record amounts of Treasuries from the Fed in its reverse repo facility since the Fed last month increased the rate it pays on the loans to 5 basis points, from zero.
In the facility investors make overnight loans to the Fed that are backed by Treasuries.
Demand has also increased as the Treasury cuts its issuance of bills to reduce its cash level before a two-year federal debt ceiling suspension expires at the end of this month.
As money funds invest more in reverse repos they can leave banks with fewer deposits, either by pulling their cash to make the investments, or by rotating out of Treasury bills and leaving other investors in turn to pull deposits to invest in bills.
The money funds are more likely to turn to reverse repos if bill yields trade below 5 basis points, which would make the reverse repo facility relatively more attractive, Pozsar said in a report on Wednesday.
Banks meanwhile are likely to invest more in reverse repos as they continue to build reserves from selling bonds to the Fed, and as Treasury bill issuance falls.
Pozsar said that demand for the reverse repos is likely to rise above $1.3 trillion by September, from around $800 billion today.
If this increase happens, and bank reserves fall to $3.50 trillion, it will indicate that banks have fewer deposits to lend in the foreign exchange swap market and in longer-dated Treasuries and mortgage-backed securities.
That could leave lending gaps in these markets that could create market imbalances.
“We are looking at transitioning from one marginal lender/buyer to another – a transition that should be smooth, but maybe not,” Pozsar said.
Banks had $3.87 trillion in excess reserves as of April, according to data by the Fed. (Reporting by Karen Brettell in New York; Editing by Alden Bentley and David Gregorio)