RRP facility drop stems from Treasury’s 5.4% bill funding, diverting funds. When RRP depletes, liquidity shortage may spike short-term rates, impacting asset classes.

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by Virtual_Crow

The RRP facility is used to take excess liquidity out of the system. Banks have a ton of extra deposits that they would loan out, and if there’s too little demand for loans they’d loan it at less than 5% (for short term loans). The Fed doesn’t want that because loaned deposits multiply the money supply due to fractional reserve banking, so they pay banks 5.3% to borrow the money (and sit on it) overnight.

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The reason the RRP facility is in free fall is because the Treasury is funding trillions of new borrowing with bills that pay 5.4%, so this money is going there instead.

A small part of the reduction may be depositors withdrawing money to go in the markets but it’s not the primary driver.

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When the RRP runs out, there is a shortage of liquidity to buy new bills, so short term rates will rise and every other asset class will see some liquidity move out of it.

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