The amount of money that investors are parking at a major Federal Reserve facility climbed to yet another all-time high as funds sought out places to stash short-term cash.
Some 101 participants on Wednesday put a total of $2.367 trillion at the Fed's overnight reverse repurchase agreement facility, in which counterparties like money market funds can place cash with the central bank. The previous record was $2.359 trillion set on Sept. 22. The facility pays an overnight rate of 3.05% — which increased from 2.30% on Sept. 22 after the Fed hiked its main policy rate by the same increment. It's the highest yield the Fed has offered on the facility since it started the daily offerings in 2013.
Participation had been increasing as many investors brace for the prospect of rapidly rising interest rates by keeping the maturity of their holdings as short as possible, enabling them to deploy cash more nimbly if officials tighten monetary policy more quickly than expected. That has spurred flows into overnight instruments that don't have a risk of capital loss, like the so-called RRP, an influx that may continue given the uncertainty surrounding the Fed's rate path. At the same time, there's been a broader shift to cash-like assets as volatility roils financial markets from equities to fixed income.
Those imbalances are unlikely to go away anytime soon even as financial conditions tighten. Fed officials said in the minutes of the July gathering the evolution of the takeup at the RRP facility would continue to depend on changes in the supply of safe, short-term investments, and demand from the money-market funds. At the same time, staff noted yields offered by money funds were well above those offered by banks and would attract inflows into money markets, which could push balances at the Fed's daily operation higher.
