Recent developments

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - The report indicates that reserve balances have fallen to their lowest levels since 2023, constituting around 11% of GDP, which is the lowest since the start of quantitative tightening (QT) [1] - Repo rates have increased since May, with the Secured Overnight Financing Rate (SOFR) settling in a new range of 5.33% - 5.35%, and daily volumes are at record highs [1] - The Federal Reserve is expected to introduce plans for winding down QT in early 2025, concluding around mid-year, contingent on market functioning [5] - Money market funds (MMFs) are expected to see moderate asset growth as the gap between bank deposits and money market yields remains wide [6] - The Treasury has ramped up its debt buyback operations, which could positively impact funding conditions by reducing dealer inventories [2] Summary by Sections Recent Developments - Reserve balances have recently fallen to their lowest levels since 2023, now around 11% of GDP [1] - Repo rates have increased, with SOFR in the range of 5.33% - 5.35% and record high daily volumes [1] - Fed funds rate remains stable despite pressures in repo markets, likely due to large liquidity held by GSEs [1] 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 [5] - ON RRP usage is expected to decline, potentially falling to around$200 billion by mid-September [5] - SOFR is expected to rise, potentially above the Interest on Reserve Balances (IORB) level in Q4 [6] Money Market Funds - Moderate asset growth is expected for MMFs as the yield gap remains wide [6] - MMFs have been conservative on weighted average maturity (WAM) extensions, leading to more investment in repo [39] Treasury and Debt Operations - The TBAC recommends T-bills to constitute an average of around 20% of outstanding debt, which may increase bill supply in the coming quarters [2][46] - The Treasury anticipates a reduction in the TGA from $850 billion to$700 billion by December 31, which may alleviate year-end funding pressures [2]