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Fed’s Money-Market Fix May Be Affecting Where People Park Cash

Alexandra Harris

(Bloomberg) -- While the Federal Reserve has said short-term interest rates are back under control following September’s upheaval, its solution may be having knock-on effects for money-market investors.

The amount of cash that was parked at the central bank’s facility for overnight reverse-repurchase agreements on Monday spiked to $27 billion. That’s the most since the end of the first half of 2019, when money-market funds and other counterparties pushed usage up to $44 billion. And although usage typically picks up around the 18th day of the month, this month’s increase is noticeably bigger.

The uptick suggests that the central bank’s recent endeavors to control short-term interest rates -- such as Treasury-bill buying and repurchase-agreement offerings -- may be displacing some investors. Money-market funds and others with cash to invest on a short-term basis typically put it to work by buying T-bills or lending in the repo market. But with the central bank now active on both of those fronts, the Fed’s reverse repo operations may be an attractive alternative.

“Traditional front-end cash investors are getting crowded out by the Fed buying bills and offering repo,” said NatWest interest-rate strategist Blake Gwinn. “That’s why we’ve been on the lookout for an uptick” in usage of the reverse repo facility.

One potential effect of the uptick in reverse-repo facility usage is to drain reserves from the banking system, in effect acting as a headwind to efforts by the Fed to bolster reserves and stabilize short-end markets.

Of course the spike is, at this stage, a one-day phenomenon and comes just a day after usage of the facility fell to a record-low $2 million. It also coincides with a part of the month when issuers of government-sponsored enterprise debt such as Fannie Mae and Freddie Mac typically have additional cash on hand that they need to stash. To figure out if there is a longer-term impact, market observers will have to wait and see if these larger spikes happen more regularly.

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker

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