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PREVIEW: 5-Year Supply Due


Futures Hit Contract High


Equities Dip Lends Support


MPC Meeting Minutes Released


The debate on whether the Fed will raise interest on excess reserves (IOER) has grown since repo rates collapsed to practically 0.0% late last wk (SOFR: 0.02%; BGCR: 0.01%; TGCR: 0.01%), while daily Effective Fed Funds Rate holds steady at 0.08%.

  • Bank of America, Citigroup, Deutsche Bank and Wells Fargo are all anticipating a hike to IOER later this year while Bank of Montreal (BMO) suggests there is even a chance of an off schedule policy annc from the Fed if EFFR slips 5%. "There is ample room for the Committee to raise the administered rate within the target band and head off any worries on the lower bound's integrity in a reversal of the cuts that brought EFFR lower several times over the last cycle," BMO said.
  • Counter argument From Credit Suisse contributor Zoltan Pozsar: despite the collapse in repo rates "and bill yields being possibly negative," with "robust volumes" in EFFR "between 8 and 4 bps, we don't think the Fed will raise IOR, nor do we think it should. IOR hikes won't fix what is a collateral problem." Zoltan cites 5 reasons the Fed won't hike IOER:
  • 1) EFFR won't go negative. FHLBs can deposit cash at the Fed at zero, and unless the Fed cuts that rate below zero, FHLBs won't invest below zero.
  • 2) FHLBs won't leave all their cash at zero at the Fed, given there will always be a foreign bank with the balance sheet to arbitrage the EFFR and IOR rates.
  • 3) Foreign banks currently do this arbitrage for 2 bps – they don't need much.
  • 4) FHLBs won't lend to foreign banks below 3 bps, as credit departments require at least 3 bps over the Fed's zero rate to cover foreign banks' credit risk.
  • 5) Foreign banks currently contend with 2 bps, they won't push the EFFR down to 3 bps. The fed funds market is a relationship market. Balance matters.
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