The Reverse Repo Facility and the Repo market are crucial overnight lending mechanisms operated by the Federal Open Market Committee. While repos involve banks selling US Treasuries to the Fed to obtain cash for short-term needs, reverse repos occur when banks buy Treasuries from the Fed, allowing them to generate returns on excess cash. The functioning of these facilities impacts liquidity in the financial system and plays a significant role in managing short-term obligations and interest rates.
🎯 Repo vs Reverse Repo
What are they, and what're their differences?
Put simply, they are two overnight lending markets run by the Federal Open Market Committee (FOMC)
All purchases and sales (open market operations) are made by the NY Fed Open Market Trading Desk (the Desk)
— James Lavish (@jameslavish) November 28, 2023
See, when a bank needs cash to cover short term obligations, it can sell USTs to the Fed (in return for cash) agreeing to buy them back just 24 to 48 hours later at a slightly higher price
This is called a Repo or 'Repurchase Agreement'.
— James Lavish (@jameslavish) November 28, 2023
So, if there is a lack of liquidity in the system, banks may be looking to loan their US Treasuries to the Fed for cash to cover short-term needs
Got it.
— James Lavish (@jameslavish) November 28, 2023
The Reverse Repo
Much like the repo transaction, where a bank sells US Treasuries to the Fed, in a *Reverse Repo*, the bank buys US Treasuries from the Fed
But why would they do this?
— James Lavish (@jameslavish) November 28, 2023
And so, like a mirror image of the repo, the Reverse Repo looks like this: pic.twitter.com/NJKm720KfC
— James Lavish (@jameslavish) November 28, 2023
🔍 Filling the RRF
Another thing you may have noticed recently is that we are hearing precisely nothing about the Repo market lately
Why?
Because virtually nobody is using it. pic.twitter.com/YxRodee6Zw
— James Lavish (@jameslavish) November 28, 2023
The reason for this is that the major banks are not strapped for cash, but rather swimming in it
And so, all the focus and action has been in the Reverse Repo markets
But how did this happen? Why are these banks swimming in, stuffed to the gills with, all this cash?
— James Lavish (@jameslavish) November 28, 2023
Fed 🏛 Reverse Repo
Balance pic.twitter.com/VTA49i6egk— Win Smart, CFA (@WinfieldSmart) November 29, 2023
Reverse Repo still on pace to be drained by late February. This is what is keeping Fed reserves extremely elevated and continues to make a mockery of QThttps://t.co/VMbwdrgx4c pic.twitter.com/FYWGmY965K
— zerohedge (@zerohedge) November 28, 2023