Fed Liquidity and Money Market Monitor

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - Reserve balances in the US have fallen to their lowest levels since 2023, now constituting around 11% of GDP, indicating a shift towards "ample" liquidity conditions [2] - Repo rates have increased since May, with SOFR settling in a new range of 5.33% - 5.35%, and daily volumes are at record highs, reflecting high demand for repo leverage [2] - The August quarterly refunding announcement introduced a recommendation for T-bills to constitute an average of around 20% of outstanding debt, which may lead to higher bill supply in the coming quarters [3] - The Treasury has ramped up its debt buyback operations, which could positively impact funding conditions by reducing dealer inventories [3] - The report anticipates that the Fed will introduce plans to wind down quantitative tightening (QT) in early 2025, concluding around mid-year [6] - Money market funds (MMFs) are expected to see moderate asset growth as the yield gap between bank deposits and money market yields remains wide [7] - SOFR is expected to rise over the coming months, potentially reaching or exceeding the IORB level in Q4 [7] - A technical adjustment to lower the ON RRP rate by 5 basis points could occur later this year if SOFR rises sustainably [8] Summary by Sections Recent Developments - Reserve balances have declined significantly, and ON RRP balances have resumed their decline [2] - Repo rates have increased, with high demand for repo leverage due to rising Treasury inventories [2] Policy and Market Outlook - QT is expected to stop when reserve balances reach around $3 trillion, with plans to wind down QT anticipated in early 2025 [6] - ON RRP usage is expected to decrease, with average daily use potentially falling to around$200 billion by mid-September [6] Money Market Funds - Moderate asset growth is expected for MMFs as the yield gap remains historically wide [7] - MMFs have been conservative on WAM extensions, leading to increased investment in repo [40] Treasury and Debt Operations - The TBAC's updated recommendation for T-bills may result in higher bill supply over the next few quarters [47] - The Treasury anticipates a reduction in the TGA from $850 billion to$700 billion, which may alleviate year-end funding pressures [3]