Overnight repurchase, English is O VER N IGHT R everse R E P Urchase, referred to On RRP, yes Fed A monetary policy auxiliary tool launched in 2013, the purpose is to allow the Federal Reserve to quickly absorb excess US dollars outside the banking system in the short term.It is mainly used to shrink the US dollar in the market.The lower limit interest rate, also known as “floor interest rate”.
Reverse repurchase overnight actually played a short-term “Shrink” In the process, because the dollar on the market entered the Federal Reserve account, it did not circulate in the market in the short term.
Therefore, paying attention to overnight repurchase volume is of great significance to understand the liquidity of the US dollar in the market.
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Directory of this article
- How did the overnight reverse repurchase?
- What is the significance of reckless repurchase overnight?
- Why does the Fed launched overnight reverse repurchase tools?
- How is the overnight repurchase interest rate formulated?
- What does the increase in rebates overnight?
- More Fed interest rate introduction
- More US investment strategies
How did the overnight reverse repurchase?
The following is the Federal Reserve’s overnight repurchase since 2018.The unit is Billions of Dollars.At present 2 trillion US dollars.
The process of reverse repurchase overnight is: the Federal Reserve will “lend” a variety of bonds held the day before yesterday.Interests are also given to the institution, and the institution will “return” the bonds obtained the previous day to the Federal Reserve.
During this process:
- “Bond” includes US Treasury, Institutional bonds or Housing mortgage securities(MBS), etc.
- “Institutions” include institutions outside bank systems such as Money Market Funds and financial deposit institutions; financial deposit institutions;
- “Interest” is according to Overnight reverse repurchase interest rate Calculated interest.
The original intention proposed by the overnight reverse repurchase tool is to allow the Fed to better adjust the liquidity of the US dollar in the market.When the market is excessive, use overnight reverse repurchase tools to absorb excess US dollars and help the market return to a stable state.
The overnight repurchase interest rate is determined by the Federal Reserve.This interest rate is the lower limit of the “interest rate corridor” set up by the Federal Reserve.
It should be noted that it is different from the Federal Reserve overnight.Overnight repurchase tool(Standard Repo Facility (SRF), these two processes are exactly the opposite.Overnight reverse repurchase is the Fed’s market liquidity, and overnight repurchase tools are injecting liquidity in the market to the market.
What is the significance of reckless repurchase overnight?
The purpose of the overnight reverse repurchase is to assist the Fed’s contracted market in the market.When there is an excess of the dollar in the market, you can reasonably absorb excess US dollars through an effective tool, maintain reasonable liquidity in the market, and maintain the healthy development of the market.
The following is the explanation of Pensioncraft on the overnight reverse repurchase:
Overnight, the starting effect of reverse repurchase principle as follows:
If an excess US dollar appears in the market, if it is not absorbed in time, it may cause inflation due to excessive dollar and disrupt the normal development of the economy.At the same time, overnight reverse repurchase can also be used as a US dollar account for financial institutions.When financial institutions urgently need US dollars, they can withdraw the US dollar overnight repurchase, instead of selling U.S.Treasury bonds.This also guarantees the market in the market.Stability of US Treasury bonds.
For financial institutions, if excess US dollars cannot obtain reasonable benefits through conventional financial investment, they can seek a method of asset allocation that can obtain safe and reasonable returns.As a result, the institution can put forward the Federal Reserve’s demand for reverse repurchase overnight.The agency handed over the excess money to the Federal Reserve, replaced the bonds, and returned the bonds to the Federal Reserve the next day to recover the principal and obtain interest at the same time.If necessary, this operation can be continued the next day, so that these excess cash can be value.
When the repurchase continued overnight, it was equivalent to the Fed’s recovery from the market from the market, because as long as the overnight reverse repurchase occurred, the money was in the Federal Reserve account instead of the market.The “shrinkage”.
As a result, overnight repurchase passed Federal Reserve “sell” bonds,, Provide interest when “buy back” To absorb excess cash on the market and assist the Federal Reserve to maintain the balance of market liquidity.
Why does the Fed launched overnight reverse repurchase tools?
The Federal Reserve sets a target Federal fund interest rate(Federal Funds Target Rate) to regulate the US dollar liquidity on the market, which is the so-called “anchor interest rate”.With Federal Fund interest rates, when the market has inflation, the Federal Reserve increases the interest rate value to inhibit inflation and control prices to rise.When currency tightening occurs, the Fed will reduce interest rates, increase market currency circulation, and stimulate consumption.
However, the interest rate in actual use is not a fixed value, but a interest rate range based on the target fund interest rate, which is commonly known as ” Interest rate corridor“, English is Interest Rate Corridor This interest rate interval is the interest rate interval provided when the Fed provides loan tools and deposit tools to financial institutions.The lower limit of this interest rate corridor is limited by the overnight repurchase interest rate set by the Federal Reserve.
In order to cope with the severe overcapacity of the possible US dollar, the Fed launched overnight reverse repurchase tools.The role of the tool is that when the federal fund interest rate cannot effectively control the currency, the Fed can quickly absorb the bank system outside the bank system in the short term.Excess cash.
In the process of adjustment, if the FFR is higher than on RRP, it means that the institution can get more interest returns than the Federal Reserve by lending funds to other financial institutions, so that on RRP will not work.If the FFR is shorter than on RRP, the institution is more willing to take the surplus funds to the Federal Reserve to obtain a better interest return, and the ON RRP starts its role.It will also increase the FFR interest rate to ON RRP, so ON RRP has become the lower limit of the interest rate corridor.
In the past, overnight repurchase was auxiliary tools for the Federal Reserve to adjust monetary policy, and its use and transaction volume was not large.However, since 2021, the transaction volume of reverse repurchase overnight has increased rapidly, and it has even recently exceeded $ 2 trillion.
This is mainly due to the COVID-19 epidemic, the Federal Reserve stimulates the economy by increasing the amount of currency issuance.As the epidemic slows down, the resumption of work in various industries, these additional US dollars have become excess cash in the market.At the same time, the price of almost all investment assets is severely overestimated.Where to replace debts from the Federal Reserve, obtaining interest on reverse repurchase overnight, and obtaining a certain amount of income, thus the total overnight reverse repurchase exceeds US $ 2 trillion.
At the same time, the Federal Reserve briefly recovered some excess cash in the market and played a brief “shrinkage” role.
How is the overnight repurchase interest rate formulated?
The overnight reverse repurchase interest rate was formulated by the Fed’s FOMC meeting and through the New York Fed ’s Open Market Trading Desk of New York’s Federal Bank of New York 【source】 Essence
For example, on October 25, 2022, the overnight repurchase interest rate was 3.05%.Therefore, the borrowing rate between actual banks was higher than 3.05%.
In other words, if the Bank of Japan deposits the excess US dollar into the Federal Reserve, the Bank of Japan
The historical data of the overnight repurchase interest rate is shown below:
Emphasize again: The overnight reverse repurchase interest rate is the lower limit of the interest rate corridor formulated by the Federal Reserve Essence
What does the increase in rebates overnight?
The increase in reckless repurchase overnight often means that the institution has a large amount of excess funds.For example, the overnight repurchase volume has risen sharply since 2021.
This phenomenon may mean the following issues that can be followed 【source】 The
1.Excess of the dollar outside the banking system
The institutions outside the banking system mainly refer to the currency market fund.The English is Money Market Funds, referred to as MMF for short, which is a personal account similar to the interest check check account.
During the COVID-19 period, the quantitative easing policy has purchased a large number of government bonds and MBS, which greatly increases the market’s US dollar supply.Such accounts have also obtained a large amount of funds, but at the same time, high-quality investment objects are in a shortage state.Therefore, with the relief and end of the COVID-19, these surging funds lead to overpopulation of US dollars, thereby increasing the overnight repurchase.
2.The supply of US Treasury bonds decreases
During the COVID-19 period, the Ministry of Finance increased the impact of the epidemic by adding US Treasury bonds, so that the amount of reserve in the TGA account of the US Treasury of the United States increased.
With the ease of the epidemic, the Ministry of Finance began to reduce the amount of US Treasury bonds.With the reduction of US Treasury issuance, the decrease in risk-free assets in the market, thereby increasing the market’s US dollar stock and leading to an increase in ON RRP.