The Fed's reverse repo use just hit a fresh record of $2.4 trillion — why that's one of the clearest 'bad signs' for the market

The Fed's reverse repo usage just hit a new record of $2.4 trillion - why that's one of the clearest "bad signs" for the market
There was another record recording of the amount of cash investors are stashing at a major Federal Reserve facility.
The Fed parks banks' excess cash reserves in the Overnight Reverse Repurchase Facility. A reverse repo, or RRP, helps the central bank conduct monetary policy by selling securities to counterparties to later buy them back at a higher price—essentially as a short-term loan.
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The RRP facility hit $2.367 trillion on Sept. 28, up from the previous record of $2.359 trillion set on Sept. 22.
Investors are holding on to old, reliable cash to weather the current economic uncertainty -- but it doesn't seem like the market will return to normal anytime soon.
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Investors stash their cash for safekeeping
Rising interest rates have caused investors to back away from risk-taking - the S&P 500 has plummeted for three consecutive quarters - meaning they are now turning to lower-risk, safer-yield avenues.
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Enter cash and cash-like assets. Investments such as money market funds, which are fixed income mutual funds that invest in short-term, low-risk debt securities, have been a safe bet for investors during periods of high volatility.
The Treasury has shrunk its cash balance to about $300 billion (returning to pre-pandemic levels) from about $1.6 trillion in early 2022. The decline in bill issuance means investors needed a place to put their leftover money - and that place was the RRP facility.
Since March, experts have been assuming that RRP usage will increase to help normalize the supply of cash.
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Then, in July, when the Fed explained the increase in RRP participation, it pointed to larger investments by money market funds and continued reductions in Treasury bill issuance, which impacted returns on other investment options available to those funds.
Why this is a bad sign for the market
The Fed is currently paying an overnight rate of 3.05% from September 22 - the highest yield since 2013. It rose from 2.30% after the central bank recently hiked interest rates by 0.75 percentage point.
Increasing the reverse repo rate restricts the cash supply and helps correct inflation.
However, whenever banks and other financial institutions have turned to the Fed's main lending facilities in the past, it has been a clear indicator of economic instability. It was the tensions in the repo market in 2007 that created that year's financial panic that led to the 2008 financial crisis.
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Utilization of the RRP facility could increase further depending on the supply of short-term assets and demand from money market funds, Fed officials noted at the July meeting.
Bank of America strategists recently reported that investor sentiment was at its lowest since 2008. And the bank expects cash and commodities to continue to outperform bonds and stocks.
In the week ended September 21, cash inflows totaled $30.3 billion, according to EPFR Global data.
Experts predict the market will remain volatile for the rest of the year as fears of a recession next year linger and continue to unsettle investors.
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This article is informational only and should not be construed as advice. It is provided without any guarantee.

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