NEW YORK U.S. prime money market funds parked $72 billion with the Federal Reserve in December as the central bank ramped up its testing of a program aimed to help the central bank achieve its targeted interest rate when it eventually begins raising rates, a report by J.P. Morgan Securities released on Monday showed.
The amount placed by prime money funds in the Fed's fixed-rate reverse repurchase agreement program last month was up from $68 billion in November, J.P. Morgan said.
The Fed's reverse repo test has involved money funds, banks and government-sponsored enterprises placing fund with the central bank overnight in exchange for Treasuries. These counterparties earn interests on the reverse repos.
The amount of reverse repos that prime money funds held at the end of December was equivalent to 5 percent of their $1.5 trillion in total assets, J.P. Morgan said.
On December 31, the Fed awarded a record $197.8 billion worth of fixed-rate reverse repos, paying an interest rate of 0.03 percent to 102 bidders, according to data from the New York Federal Reserve, which doesn't offer details on bidders.
The year-end spike in money funds' allocation into the Fed's reverse repo program "was not surprising given the typical tight supply conditions going into year-end as banks and dealers manage their balance sheets, while cash investment needs typically increase," J.P. Morgan analysts wrote in the report.
The funds' increased holdings of reverse repos came at the expense of their ownership of European bank debt.
Their exposure to the euro zone fell by about $36 billion to $227 billion at the end of 2013. For the year, their euro zone debt holdings grew by $24 billion, J.P. Morgan said.
Their exposure in British, Swiss and Nordic banks also fell at year-end. Those holdings declined by about $36 billion to $197 billion, resulting in an annual drop of $17 billion.
(Reporting by Richard Leong; Editing by David Gregorio)