Williams says counterparties need repo rates materially above SRF rate before using the facility due to frictions.
“These frictions add to the costs that counterparties face when using the facility and mean that counterparties generally require private market repo rates to trade materially above the SRF minimum bid rate before using the facility.”
Williams argues specific market factors shifted the reserve demand curve downward rather than indicating reserves left ample range.
“I interpret the remaining factors (seasonally low bill supply, increased dealer repo intermediation capacity, reduced repo financing demand, and a temporary increase in government-sponsored enterprise [GSE] repo investment activity) as ones that induced a downward shift in the reserve demand curve.”
Williams reports centrally cleared MMF repo volumes exceed one trillion dollars, over half of MMF Treasury repo positions.
“Data indicate that MMF repo volumes cleared with FICC well exceed $1 trillion, comprising over half of MMF Treasury repo positions ( Panel 8 ).”
Williams expects Fed will reach ample reserves soon based on sustained repo market pressures.
“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.”
Williams reports Treasury repo rates fell 15 basis points below IORB in mid-May, causing two basis point EFFR decline.
“Treasury repo rates later notably declined, falling as low as 15 basis points below the interest rate on reserve balances (IORB) in mid-May, though they have since rebounded.”