Here's What The Fed's IOER and Reverse Repo Rate Hikes Means

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Here's What The Fed's IOER and Reverse Repo Rate Hikes Means 7 hours ago

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Here's What The Fed's IOER and Reverse Repo Rate Hikes Means

There were no major changes in Fed policy - the fed funds target range and QE purchases did not change - although one can argue that the taper narrative did change, and as we predicted it would, it is now a bullish catalyst of sentiment... after all, with $520BN in excess liquidity parked at the Fed reverse repo facility, something is clearly broken.

Narrative change: taper is bullishhttps://t.co/SgZhYSyTaZ

— zerohedge (@zerohedge)

https://twitter.com/zerohedge/status/1405242224779145220?ref_src=twsrc%5Etfw

That said, there were two tangible, if less noted changes: the Fed adjusted two "technical" or "administered" rates, raising both the IOER and RRP rates by 5 basis points (as correctly predicted by Bank of America, JPMorgan, Wrightson, Deutsche Bank and Wells Fargo while Citi, Oxford Economics, Jefferies, Credit Suisse, Standard Chartered, BMO were wrong in predicting no rate change).

What does this mean?

Well, as Curvature Securities repo guru, Scott Skyrm writes, clearly the Fed intends to move overnight rates above zero and drain the RRP  facility of cash.

But what does this really mean for overnight rates and RRP volume? As Skyrm further notes, the increase in the IOER should pull the daily fed funds rate 5 basis points higher and, in turn, put upward pressure on Repo GC. Combined with the 5 basis point increase in RRP, GC should move a solid 5 basis points higher.

While it feels like the first objective is complete - fed funds and Repo GC will trade 5 basis points higher - Skyrm, however, does not don’t think RRP volume will change very much as Skyrm explains:

When market Repo rates were at 0% and the RRP rate was at zero, ~$500 billion went into the RRP. Well, if both market Repo rates and the RRP rate are 5 basis points higher, there's no reason to pull cash out of the RRP. For example, if GC rates moved to .05% and the RRP rate stayed at zero, investor preferences to invest at a higher rate would remove cash from the RRP.

Bottom line: with both market rates and RRP at .05%, there's really no economic incentive for cash investors to move cash to the Repo market.

In other words, the Fed's rate change may have zero impact on the Fed's reverse repo facility, or the record half a trillion in cash parked there.

Tyler Durden Wed, 06/16/2021 - 15:43