The New York Federal Reserve reported a significant drop in its reverse repurchase agreements (reverse repos) on Monday, accepting $316.246 billion, the lowest amount since May 2021. This is a decrease from $338.473 billion recorded on Friday.

Analysts suggest that this decline may be due to investors shifting their funds from the reverse repo market to the overnight repo market. In the overnight repo market, banks and financial firms, including hedge funds, borrow short-term cash using Treasuries or other debt securities as collateral. Scott Skyrm, Executive Vice President at Curvature Securities, explained that investors often move into cash when they sell off riskier assets, which then gets invested in the repo market.

The reverse repo facility is a crucial tool used by the New York Fed’s Open Market Trading Desk to manage short-term interest rates. In these transactions, market participants lend cash to the Fed overnight at an interest rate of 5.30%, securing government securities as collateral with the agreement to repurchase them.

Lou Crandall, Chief Economist at Wrightson, noted that increased market funding needs, following a recent rally in Treasuries, likely encouraged money funds to invest their cash in private repos rather than the Fed’s reverse repo facility.

The shift from reverse repos to repos, amidst a downturn in stock markets, might have contributed to the softness observed in repo rates on Monday. Skyrm indicated that this trend could persist throughout the week. Despite this, general collateral (GC) repo rates remain higher than those on reverse repos.

According to data from Curvature Securities, the GC repo rate started at 5.45%, dipped to 5.28%, and closed at 5.35% on Monday. The GC rate reflects the value of a basket of securities that are typically interchangeable without affecting the repo rate.

Analysts also anticipate that an increase in Treasury bill supply on Tuesday and Thursday may further reduce cash levels in the reverse repo facility.

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