USD Money markets : ever harder balancing act

U SD Money Markets are grappling with a state of Excess Reserves which concentrates every front end market around zero percent : SOFR fixings are stuck at 1bp since March , EFFR at 6bp , and $3mL achieves record lows on a daily basis and went under the 14 bp mark . A more and more sizable part of excess liquidity injected by the Fed ultimately find its way back to the Central Bank : use of the Reverse Repo O/N facility at the Fed (RRP O/N, which can be seen as a deposit facility for non bank counterparties ) went from $30 Bn to $480 Bn in just six weeks. This trend follows a combination of three factors : the downsizing of the Treasury general account at the Fed, through stimulus payments, creation of bank reserves due to the Quantitative Easing programme and greater competition on Tbill markets where more investors trade on lower Tbill outstanding. We review these me c h anisms from the perspective of the Tr easu r y , banks , Money Market Funds (MMF) and other Money markets , and highlight the regulatory constraints for these key actors . We expect this condition to last for at least several months, which will continue to narrow the BOR OIS spread and ultimatly lead the Fed to adjust both IOER and RRP O/N rates . However , Repo volumes remain robust and we do not see the current situation as a systemic risk . Although , some of the weaknesses exposed by the market disruptions in recent history (Septembe r 2019, Mar ch 2020, F ebruary 2021) have yet to be resolved and remain a risk area to be reckoned with.