Pozsar On Latest Fed Tweaks

Credit Suisse's Zoltan Pozsar notes that "the Fed's decision to raise the counterparty cap of the o/n RRP facility today from $30 to $80bn is the right move to deal with the "tsunami" of reserves that was finally unleashed this week with the disbursement of stimulus checks. While the adjustment is not quite the same as uncapping the o/n RRP facility, it's very close, and the Fed showed a willingness today to raise counterparty caps further if need be."

• "Today's adjustment also means that hikes to the IOR and o/n RRP rates won't be necessary. In our view, the fact that the Fed made this adjustment practically pre-emptively – the o/n RRP facility is not being used at the moment, so there are no capacity constraints yet, while repo and bill yields aren't trading negative yet – suggests that the Fed is "foaming the runway" for the end of SLR exemption."
• "On the back of today's news, we forecast that money markets will trade similar to how they traded last year: in a 0-10 bps range, with o/n fed funds at 7bp and o/n repos and bills near zero, but not below. The o/n RRP facility and the foreign repo pool will serve as substitutes for bills, freeing up bill supply for those without access to these facilities, while those with more flexible mandates will do more FX swaps. This means that the bottom of the rates spectrum will not be pushed into negative territory, but the top of it – FX swaps – will be subject to ongoing pressures to trade tighter and flatter relative to OIS. Given that our call for a zero-to-negative FRA-OIS spread by the end of June was predicated on the end of SLR extension and an assumption that the Fed will try to fix a quantity problem with prices, not quantities, today's adjustments mean that FRA-OIS won't trade all the way down to zero or negative territory. FRA-OIS from here will be a function of how tight FX swaps will trade relative to OIS, but Treasury bills trading at deeply sub-zero rates is no longer a risk."