Bonds News

UPDATE 1-Fed reverse repo volume soars to another record after rate adjustment

(Recasts, adds comment)

NEW YORK, June 17 (Reuters) - The Federal Reserve’s reverse repurchase window attracted a record $755.8 billion in cash on Thursday, as financial institutions continued to flood the facility with liquidity in exchange for Treasury collateral.

The surge in cash came despite the Fed on Wednesday, at the end of its two-day policy meeting, making a technical adjustment to the interest rates it manages, aimed at keeping its key overnight benchmark interest rate from falling too low.

The Fed raised the interest rate it pays banks on reserves (IOER) held at the U.S. central bank to 0.15% and also lifted the rate it pays on overnight reverse repurchase agreements to 0.05%, a tool used to set a floor on short-term interest rates.

Analysts said the increase in IOER should pull the daily fed funds rate five basis points higher and, in turn, put upward pressure on the repo, general collateral rate.

The effective fed funds rate, the rate banks charge each other for overnight loans to meet reserves required by the U.S. central bank, was still at 0.06% which might move on Friday since the IOER and reverse repo rates are effective on Thursday.

But the repo GC rate rose to 0.06% on Thursday, from 0.01% the previous session.

The GC repo rate corresponds to that rate of a basket of securities that are trading normally or have nothing special going on. GC securities can therefore be substituted for one another without really changing the repo rate.

The IOER increase should be an incentive for financial institutions to put their money in the repo market instead of the Fed’s reverse repo window.

Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities said the increase in the reverse repo rate would have little impact on volume, however.

“When market repo rates were at 0% and the reverse repo rate was at zero, more than $500 billion went into RRP,” said Skyrm. “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.” (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley, Chris Reese and Sonya Hepinstall)