The trajectory of daily balances in the Fed’s RRP facility remains a focal point for market participants with reason to trouble themselves over such matters.

To be clear (and to be honest) that’s not most market participants. I try, whenever possible, to be straightforward about the extent to which many of the dynamics discussed here on a daily basis simply aren’t relevant for everyday investors.

This dynamic is relevant for pedestrians (so to speak) only to the extent usage of the Fed’s RRP facility doesn’t continue to wane. If RRP declines stall with Treasury still rebuilding its cash balance, that could lead to greater reserve drain and eventually reserve scarcity before the Fed has a chance to address the problem (e.g., by halting QT).

Importantly, the Fed learned from the September 2019 episode, and there are fail-safes in place to avert another repo squeeze. Still, the ideal scenario is for the TGA rebuild to be enabled by RRP transformation. It looked, for about a month, like RRP drain might’ve stalled. You can see that clearly in the figure below.

Happily, the amount parked in the Fed’s RRP garage resumed its decline since August 24, prompting a small sigh of relief from anyone who was worried. Since the debt ceiling deal, RRP usage is down more than $600 billion.

“Given falling expectations of additional rate hikes from the Fed, receding uncertainty over the rate path has made it attractive to money market funds to extend weighted-average maturities in their portfolios and snap up additional bills,” BNY Mellon’s John Velis said Monday, adding that RRP usage will likely recede further, mitigating pressure on reserves. “The interplay between reserves, the TGA and RRP usage will continue to be a concern of ours, but recent trends are encouraging,” he remarked.

Recall that money market fund balances hit another new record high last week at $5.583 trillion.

JPMorgan expects 2023 to be the biggest year for money fund inflows in at least a decade. Analysts led by Teresa Ho called this year’s influx to US funds (some $850 billion) “extraordinary.”

The key is coaxing that money out of RRP and into bills. Two considerations are: Yield pickup and maturity extension. If bills aren’t attractive relative to RRP, there’s no incentive for money market funds to make the switch. And if additional Fed hikes are on the table, that complicates the decision calculus.  Of course, not everyone has access to the RRP facility, and to anyone who doesn’t, current bill yields are attractive.

Whatever the case, it seems fairly obvious that institutional investors are inclined to throw money at bills. Treasury hasn’t had any trouble finding buyers for the tsunami, and there’s plenty of scope for money funds to absorb additional supply.

Oxford Economics cited auction settlements and monthly GSE cash flow reversals in explaining lower RRP take-up over the past two weeks. Curvature Securities’ Scott Skyrm pointed to QT. “The market needs cash to pay for these securities,” he said. “Some of that cash comes from the RRP facility.”