Artis Real Estate Investment Pref Shs Series E T.AX.PR.E

Reverse repo facility has crashed

[Torontojay]

Back in April of 2023 there was ~ $ 2.3 trillion parked at the Federal reserve in the Reverse Repo facility. The Central Bank pays out the lower band of the Federal Funds target range to commercial banks which in this case is 4.25%.  Then something interesting happened in the past year and a half. Janet Yellen decided to finance her government spending with t-bills which was a stealth version of QE. It's worth noting that the yield curve was inverted so it was more expensive for her to borrow at the short end of the curve. Nevertheless, she knew this but did it instead because of the liquidity from this facility. After the pandemic hit, the banks were flush with cash and they parked this excess cash at the Reverse Repo facility collecting a return. If you had money market funds, your money was at this facility. You would sell it in exchange for t-bills because it was earning a higher interest rate and was short term in nature. 

Janet Yellen was using the back door of financing her spending with t-bills. How was she able to do this? From the Reverse Repo facility. This is where the liquidity came from which is why it was called stealth QE. It was the exact opposite of what the Federal Reserve was doing with their quantitative tightening program. So most of this money ($ 2.3 trillion) was sold and used to finance the government spending by issuing t-bills instead. Well, unfortunately for Janet Yellen, the days of doing stealth QE are over as most of this money is now gone.  From $2.3 trillion in April of 2023 it is now down to $98 billion as of Dec 20th and the yield curve is beginning to normalize. 

2025 is shaping out to be another 2022 with QT back in full force. 

https://fred.stlouisfed.org/series/RRPONTSYD