Roberto Perli, the person who actually runs the Federal Reserve Bank of New York’s trading desk, is waving a yellow flag at short-term funding markets. His message: higher Treasury bill issuance is tightening money market conditions, and participants should pay attention.
The mechanics of a $350 billion drain
Between early July and mid-September, the Treasury issued a wave of new bills to rebuild the Treasury General Account, essentially the government’s checking account at the Fed, to roughly $800 billion. Every dollar that flows into the TGA is a dollar pulled out of the banking system’s reserves. The government sucked $350 billion out of the financial system’s liquidity pool to refill its own coffers.
The collateral damage showed up immediately in the Fed’s Overnight Reverse Repo facility. The ON RRP saw its balances crater from around $200 billion to effectively zero. When money market funds and other participants stop parking cash at the Fed, it means they’re deploying it elsewhere into private financial instruments, favoring the relatively higher yields offered by T-bills.
Perli specifically noted that repo rates have become far more sensitive to the timing of Treasury bill issuance. When the government dumps a big batch of bills on the market, short-term borrowing costs can spike unpredictably.
