Money Market Update
as the Fed announced morning repo operations in late december, the year-end turn went from stormy to calm. now, as 2025 begins, it's the debt ceiling's turn to induce volatility in money markets
In case you missed it — or you’ve just joined us — right as we were about to publish our last piece, the Fed executed steps to calm money market pressures over the year-end turn...
These actions have required us to rethink not one but two articles we were in the process of writing, which happened to be large pieces of work. Thus, we’re releasing some pieces on more timely plumbing topics (a clue below) beforehand.
But first, a gradually improving money market update...
Summary & Brief Commentary
The Fed, along with the usual afternoon program, announced morning SRF (Standing Repo Facility) operations over year-end — a sign that the Fed’s Repo Defensive is now in motion. In talks with participants, central bank officials’ willingness to hold morning operations prompted traders to negotiate repos at lower rates.
The stigma of using the SRF, however, persisted and became evident as hundreds of billions in repos traded above the Fed’s minimum SRF bid — the cheapest rate available — yet nobody tapped the facility at year-end.
Despite these operations, as anticipated, we saw a spike in FX swaps conducted with the Fed (as JPMorgan’s immense stockpile of reserves couldn’t bridge all imbalances), a massive rise in Fed RRPs (as dealers rejected money funds’ cash balances to tidy their balance sheets), and a subsequent sharp decline in bank reserves (as an increase in Fed RRPs causes a decrease in reserve balances).
These flows will shortly unwind as money funds move out of the RRP and back into private repos, with dealers and banks now willing to offer balance sheet capacity.
Moreover, EFFR (the Fed Funds rate) didn’t budge at year-end, further verifying that recent rate upheavals are funding-related, not down to the scarcity of reserve balances in Fed accounts.
Meanwhile, in macro markets, the sharp rise in the U.S. dollar index is not a sign of waning liquidity but the result of markets pricing in the Trump trade and relative weakness in Europe. Conks’ monitors (below) suggest “business as usual” for dollar liquidity and, thus, risk assets — i.e. up and to the right.
Lastly, the debt ceiling will become the most prominent theme in money markets until (and briefly after) a resolution has been reached in Congress. Interbank liquidity will rise as the TGA gets drawn down, yet this will not necessarily ease funding pressures. More on that later…
Now, for the chartbook (more monitors on the way)…
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The FX Swap operations over year end look only to be just over $1B with ECB, does that (relatively) tiny amount for an FX Swap really make any difference ?
Can I know the main participants in the TRP/DVP/GCF repo?
And this time SRF Repo was not used, what do you think is the reason for that?