Launched at an unprecedented capacity, the “printing press” of the US Federal Reserve System drowned the key money market of the global financial system in liquidity.
The American repo market, where banks can “park” free cash or get a dollar loan secured by securities, is drowning in a surplus of dollars, which statistics have not yet seen.
Having increased the balance sheet by $ 3 trillion over the past year, the Fed continues to buy US government bonds from the market and pump $ 120 billion into the system every month.
As a result, there is more and more “cache” in the system, and fewer available collaterals – in the form of government securities. This forces banks to de facto deposit dollars back to the Fed.
The volume of reverse repo transactions, within which market participants park overnight liquidity in the central bank, taking treasuries from its balance sheet, has been steadily and rapidly growing for two months.
Back in mid-March, the demand for such deals was zero. By the end of April, he reached the level of $ 200 billion, on May 20 – it exceeded $ 300 billion, and on Thursday, May 27, reached $ 485.33 billion – an absolute record, follows from the data of the Federal Reserve Bank of New York.
There is so much liquidity in the system that it has turned into “hot potatoes that no one wants to keep,” says Andreas Steno Larsen, strategist at Nordea.
A paradoxical situation has arisen in the market: the FRS “prints” dollars and buys out government bonds, and banks return these dollars to take government securities that have become scarce from its balance sheet.
The Fed’s operations have become a “sponge absorbing dollars” that are no longer able to digest the traditional repo market, where rates fall to negative values, notes Vice President of Curvature Securities Scott Scrim. A year and a half ago, the situation was the opposite: in the fall of 2019, there was a shortage of dollars in the repo market, and rates on overnight loans jumped to 7-10%. This forced the Fed to start pumping liquidity again – first through repo transactions with banks, and then – from March 2020 – through direct asset purchases.
The actions of the US Treasury are also superimposed on the Fed’s operations, Larsen points out: the US government is actively spending money, including on direct payments to the population.
From April 1 to May 26, the US Treasury’s account with the Fed lost $ 267 billion, and this process will continue: by the end of the quarter (July 31), the Ministry of Finance plans to have $ 450 billion against $ 778 billion now.
The dollars from the budget go to the banking system, increasing the excess liquidity. This process, however, is close to its peak, warns Larsen.
In the third quarter, the US Treasury again plans to switch to accumulation of funds (+300 billion dollars), while the Fed will probably announce plans to roll back quantitative easing in September against the backdrop of a sharp acceleration in inflation, the expert said.
The American central bank itself, however, is in no hurry to scare the markets by stopping the “printing press”, thanks to which the capitalization of the world’s stock exchanges has doubled in a year and exceeded the size of global GDP.
By the end of 2022, the Fed’s balance sheet could grow to $ 9 trillion, the New York Fed said earlier this week. That means an additional $ 1.6 trillion in inflows over the next 18 months.