Treasury Invoice Provide and ON RRP Funding

Gara Afonso, Marco Cipriani, Catherine Huang, Gabriele La Spada, and Sergio Olivas

Take-up on the Federal Reserve’s In a single day Reverse Repo Facility (ON RRP) elevated from a number of billion {dollars} in January 2021 to round $2.6 trillion on the finish of December 2022.  On this put up, primarily based on a current Employees Report, we clarify how the provision of U.S. Treasury payments (T-bills) impacts the choice of cash market mutual funds (MMFs) to take a position on the facility. We present that MMFs responded to a discount in T-bill provide by rising their take-up on the ON RRP, serving to to clarify the elevated general take-up.

MMFs’ Demand for U.S. Treasury Securities

U.S. MMFs are open-end mutual funds regulated by the Securities and Alternate Fee (SEC) that may solely put money into secure and extremely liquid money-market devices denominated in U.S. {dollars}. Amongst such devices, U.S. Treasury securities are particularly related due to their security and liquidity. Since MMFs can’t maintain securities with a remaining maturity larger than 397 days, T-bills are an particularly interesting funding choice for them. MMFs’ demand for Treasury securities, furthermore, has grown considerably since October 2016, when the Securities and Alternate Fee (SEC) carried out an vital reform of the MMF business; this reform led to a rise in belongings underneath administration of greater than $1 trillion for presidency MMFs—a kind of MMF that may solely maintain Treasury securities, company debt, or repurchase agreements collateralized by these belongings.

Treasury Provide Decreases after the COVID-19 Disaster Subdues

In response to the COVID-19 pandemic, the U.S. Treasury expanded its debt issuance, and particularly its issuance of T-bills, which accounted for 83 p.c of the newly issued marketable authorities debt between March and September 2020. Because the chart beneath reveals, T-bills excellent elevated from $2.66 trillion to $5.03 trillion throughout this era. As financial situations improved, the issuance of T-bills returned to ranges nearer to historic requirements, and T-bills excellent decreased from $4.95 trillion to $3.51 trillion between January 2021 and July 2022. 

T-bills Excellent Decreased from January 2021 to July 2022

Take-up on the ON RRP Will increase as T-Payments Grow to be Scarce

One of many drivers of the rise in ON RRP take-up could have been the relative scarcity of T-bills, which restricted MMFs’ funding choices, making funding on the ON RRP a gorgeous various. As we mentioned in a earlier put up, the MMF business grew considerably between 2016 and 2020, increasing from $2.99 trillion in January 2019 to $4.22 trillion in December 2020, partly on account of financial coverage tightening; furthermore, a lot of this improve was concentrated in authorities MMFs, which skilled massive inflows in the course of the early levels of the COVID disaster. The ensuing improve within the demand for secure belongings from MMFs, and particularly from authorities MMFs, could have led MMFs to show to the ON RRP facility as the provision of accessible T-bills turned scarce.

To determine the impact of T-bill provide on ON RRP take-up, we exploit the differential publicity to variation in T-bill provide throughout MMFs. Authorities MMFs are extra uncovered to shocks within the T-bill provide than prime MMFs, which may additionally lend to monetary and nonfinancial firms via unsecured debt devices equivalent to certificates of deposit and business paper. Consequently, the ON RRP funding of presidency MMFs must be extra delicate to a lower in T-bill issuance than that of prime MMFs.

To check our conjecture, we run a regression evaluation of ON RRP funding on a each day panel of MMFs eligible to put money into the ON RRP, from April 2020 to August 2022, in the course of the growth and subsequent contraction of T-bill issuance. Our regressions determine the impact of T-bill issuance on the share of ON RRP funding in government-MMF portfolios relative to prime-MMF portfolios, controlling each for unobserved time-invariant fund traits and for time-varying frequent elements.

We discover {that a} lower in month-to-month T-bill issuance of $100 billion leads authorities MMFs to extend the share of their portfolios invested on the ON RRP by roughly 2.34 proportion factors greater than prime MMFs. The estimate is very vital, suggesting a causal relationship between T-bill provide and ON RRP funding. The impact can be economically vital: authorities MMFs eligible to take a position on the ON RRP had, on common, $3.3 trillion in belongings underneath administration between April 2020 and August 2022; contemplating that T-bill issuance declined by nearly $1 trillion throughout the identical interval, its impact on the portfolio composition of presidency MMFs relative to that of prime MMFs corresponds to a further improve in ON RRP funding of roughly $750 billion, towards a complete improve in ON RRP take-up of $2.2 trillion.

Summing Up

A scarcity of T-bills reduces MMFs’ funding choices, pushing them to extend their funding on the ON RRP facility. This occurred in 2021 and 2022, when the Treasury considerably lowered its issuance of payments; the impression of the discount in T-bill issuance was notably vital as a result of the scale of the MMF business, and particularly authorities MMFs, had elevated considerably between 2015 and 2020, on account of financial coverage tightening, the SEC reform carried out in October 2016, and the elevated demand for secure belongings brought on by the COVID disaster. In different phrases, as T-bills turned comparatively scarce in comparison with MMFs’ demand for secure belongings after 2020, the ON RRP facility turned a gorgeous various, absorbing MMFs’ demand for secure, short-term investments.

Gara Afonso is the pinnacle of Banking Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Marco Cipriani is the pinnacle of Cash and Funds Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.  

Catherine Huang is a Ph.D. pupil in enterprise economics at Harvard College.

Gabriele La Spada is a monetary analysis economist in Cash and Funds Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.   

Sergio Olivas is a analysis analyst within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Learn how to cite this put up:
Gara Afonso, Marco Cipriani, Catherine Huang, Gabriele La Spada, and Sergio Olivas, “Treasury Invoice Provide and ON RRP Funding,” Federal Reserve Financial institution of New York Liberty Avenue Economics, November 29, 2023, https://libertystreeteconomics.newyorkfed.org/2023/11/treasury-bill-supply-and-on-rrp-investment/.