Reverse Repo Explosion
Zoltan Pozsar- an expert on the intricacies of the Federal Reserve predicts as a result of the Fed making reverse repos more profitable that… ‘the re-priced RRP facility will become a problem for the banking system fast…’ As the article explains…’money funds (now) have an incentive to trade out of all their Treasury bills and park cash at the RRP facility.’
Does not this action put pressure on the Treasury?
To avoid default, the Treasury has to auction enormous quantities of T-Bills every week. Will not the higher rates now available via this Fed’s RRP move force the Treasury to- wait for it- increase interest rates on T-Bills if that is what it takes to complete the auction? And once the Treasury increases interest rates, does that not puncture the current belief that it is the Fed that controls interest rates and can ‘keep them zero until 2023’ as the Fed recently claimed?
Although Mr Pozsar avoids any mention of the Treasury or the recent upturn of inflation, I suspect the Fed RRP action will put the media spotlight increasingly on the upcoming Treasury auctions. How about this as the main question increasingly asked of the Treasury AND the Fed AND the White House:
‘How long can the Treasury sell the enormous continuing quantity of securities without raising interest rates?’
And with inflation in the last 3 months running at @ 8%, will raising rates on T-Bills from zero to .5% for even to a full 1% be nearly enough?
I feel very comfortable short the June 2022 Eurodollar after reading the Pozsar article.