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Pragmatic Capitalism

Capital for Living a More Practical Life

Window Dressing with Fed’s Reverse Repo Program

By Sober Look

If you are a bank or even a money market fund, you probably want your financials to show the maximum amount of your overnight liquidity placed with the Fed’s RRP rather than with other banks. Your balance sheet looks less “risky” this way. And since most financial reporting is done at quarter end (with mid-year and year-end being the most important dates), you want to place your cash with the Fed on the last day of the quarter for one night and then take it out.

RRP

Why not leave your liquidity with the Fed for a longer period? Because the Fed’s current RRP rate pays 5 basis points, while the private repo market is paying about double that. Of course as cash is pulled out of the repo markets for quarter-end and moved to the Fed or elsewhere, rates in the private markets rise. Once the cash comes back to the private markets at the start of the new quarter, the rates return to normal.

 

GC repo

 

The larger the RRP program becomes, the stronger this quarter-end effect will be. Welcome to the wonderful world of window dressing.

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