This post is an excerpt from Liquidity Trader report: Banking System Fragile As Fuse For Implosion Nears Ignition.
Where Does Homeless Money Go? Into Reverse Repos At the Fed
When the Treasury pays down T-bills, it takes that paper out of the market and sends cash back to the holders of the paper. They can’t roll it back into T-bills, because there are none to be had. So what do they do? Why, they lend it to the Fed overnight, of course! Gotta show that prudence on their balance sheet. If you can’t hold T-bills, a loan to Fed is even better. In other words. “Gonna do it. Would be prudent!”
Since February 23, the Fed has paid down $533 billion in outstanding T-bills. Some dealers and institutional recipients of that cash stretched out on the curve a bit and bought longer term paper, which helped stabilize the bond market. But as of Friday, May 21, those erstwhile T-bill holders had sent $369 billion of the cash they got from the Treasury, into overnight (same as cash) RRP accounts at the Fed. Apparently they put $164 billion into other securities and the rest into RRP.
On this chart, I’ve put RRP line item (blue) overlaid with an upside-down view of the Treasury’s cash account at the Fed (red). They don’t correspond dollar for dollar, because the Treasury is spending money on other things and receiving revenue at the same time. But the correlation is obvious.
Here’s what else is in that report. Each section shows a chart that tells a beautiful story, with a brief explanation.
Table of Contents
Total Bank Loans Stall 2
Bank Loans Ex Repo Still Growing 3
Repo Borrowing Collapses 4
Where Does Homeless Money Go? Into Reverse Repos At the Fed 5
Loans to Shadow Banks 6
Other Loans Not Classified AKA Margin, Still Growing! 7
Commercial and Industrial Loans, Stock Prices and Real Business Investment 8
Loan Loss Reserves – Finally Ratcheting Higher 9
Money Supply, Nothing To See Here, Literally 10
Bank Capital Ratio Still Crashing 16
How Much Longer Will Treasury Yields Be Stable? 18
Addenda 19
Liquidity Trader – Liquidity demystified!
