Excess Cash in the Financial System
Good morning and happy Tuesday!
We hope everyone had a fun/relaxing/safe Independence Day weekend.
The past year has been unique for the U.S. financial system. As investors, we are inundated with capital market news including daily developments on equities, fixed income, and more recently, "meme" stocks and crypto assets.
But we never hear much about what's going on "under the hood" of the financial system.
Below, we have provided a quick update on the Fed's reverse repurchase facility:
- The Federal Reserve's reverse repurchase facility has recently been experiencing massive inflows on overnight deposits.
- This overnight agreement currently pays institutions (banks, hedge funds, insurers) .05% on deposits.
- This signals too much liquidity in the financial system as a result of the pandemic stimulus.
- With US Treasury bonds paying so little, this facility is giving institutions a place to grab ultra short-term yield.
The bottom line? With few options to park excess cash, money managers are worried that investors will begin looking at riskier assets in order to drive returns. The last time we saw this? The credit/housing bubble in 2007.
Have a great week and stay safe!