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Report
Intermediary Balance Sheets and the Treasury Yield Curve
We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap ...
Discussion Paper
Banks’ Balance-Sheet Costs and ON RRP Investment
Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
Report
Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP
In June 2022, the Federal Reserve started reducing the size of its balance sheet, which had expanded to just under $9 trillion in response to the COVID-19 pandemic. However, whereas banks’ reserves at the Federal Reserve have decreased, the investment of money market funds (MMFs) at the Federal Reserve’s overnight reverse repo (ON RRP) facility has continued to increase, reaching $2.4 trillion in September 2022. In this paper, we causally identify the drivers of ON RRP take-up through a diff-in-diff approach. By exploiting a temporary change in the computation of banks’ Supplementary ...