ON Reverse Repo Takeup Cools Off

Overnight Reverse Repo takeup was only slightly higher in the week to Jun 2, with some 'cooling off' in usage of the facility following the Memorial Day holiday. Even so, the level of reserves fell slightly (-$3.4B), with the Treasury's account at the fed contracting by $29.2B for a 4-week net drop of $170.5B.

• But daily data shows ON RRP usage rising $40B on Thursday alone, the biggest jump since May 20, so the theme of continued growth amid burgeoning system reserves appears to remain intact.
• In a note Friday, Goldman wrote they expect RRP usage peaking around $1T (w reserves to $4.2T by year-end), but this amount is more conservative than the ~$1.2-1.3T one would assume if the almost one-to-one relationship between TGA drawdown/Fed assets and RRP growth continues. If net Tsy bill supply fails to ramp up, for instance, ON RRP may be end up more heavily used than Goldman has pencilled in.

Source: Federal Reserve, MNI

• Despite continued evidence of reserves putting downward pressure on overnight rates, most analysts see a Fed adjustment of administered rates as a close call. Prevailing opinion on whether the Fed will act at next week's meeting appears to be shifting toward an expectation of inaction, as the funds rate remains at 0.06% (despite a brief dip to 0.05%). MNI will have more out in our Fed Preview next Monday.