Investors Turn to RRP to Avoid Negative Rates

EDITOR NOTE: The $3 trillion repo market may not be well known among mainstream investors, but it plays a vital role in the financial system. Earlier in the month, the market once again went chaotic as the cost of borrowing the 10-year Treasury plunged into negative territory with a rate of -4.25%, a rate unseen since March of last year. Negative rates mean that some lenders are willing to actually pay borrowers, essentially getting their invested capital back at a lesser value at a later date. Apparently, some lenders were able to buy bonds at a rate of 0%--better nothing back that principal lost, right? What all of this means is that negative repo rates reflect uncertainty as to how long the Fed can sustain its easy monetary policy. And as unsustainable as it might look to some traders, the Fed and the US Treasury Department are holding fast to their position, accelerating the decline of the US dollar pedal to the metal.

The popularity of one Federal Reserve overnight deposit facility has surged as investors look for shelter from negative rates in short-term markets, which are under unusual pressure over quarter-end thanks to the flood of cash in the system.

Usage of the overnight reverse repurchase facility surged to $104.7 billion on Tuesday, the most since last April, according to data from the New York Fed. It pays an overnight rate of 0% — well above the minus 0.05% available at Tuesday’s close in the general collateral market — helping to temporarily reduce the quantity of reserve balances in the banking system.

The overnight GC govt repo rate is negative.

Look at the yield on near-term Treasury bills.

And Treasury RETURNS are negative to boot.

And the 10Y-3M Treasury curve slope is zooming upwards. Welcome to another edition of Treasury Thunderdome!

Negative Treasury yields and returns abound. Powell and Yellen are the money blasters!!

Originally posted on Confounded Interest