Repo rates are hovering just over the Fed’s overnight reverse repo (ON RRP) despite recent net positive bill issuances as Treasury raises cash for tax refunds. With fewer issuances in the near future and low dealer financing needs, the repo rate doesn’t look like it’s going to budge anytime soon.

Repo rates are failing to move higher because absent the floor provided by the ON RRP, market short-term rates would have been beneath the 3bp floor coming into February,” writes Citi analyst Andrew Hollenhorst.

Recent net positive issuances at an end

Net bill issuance fell from recent highs of nearly $70 billion for the last two weeks to $23 billion, and it will remain low until cash management bills mature on April 17 and April 24, which will send net issuances negative and only push repo rates even closer to the Fed’s ON RRP floor.

positive bill issuance 0214 Repo Rates

Dealers also seem to be in less need of overnight financing, which reduces the repo rate simply by removing some of the demand from the system, and expectations for the March repo rate have steadily fallen from more than 10 basis points at the beginning of the year to less than 7 bp now, and the ON RRP continues to prop it up.

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Fed extends ON RRP to January 2015

Hollenhurst doesn’t expect the repo rate to go above 10 bp for the rest of the year, and doesn’t expect the ON RRP to go above 5 bp until the Fed is ready to consider rate hikes, which probably won’t happen this year. The Fed has said that it will extend the operational test of the ON RRP until January next year, but there was some dissent over the decision, because not everyone is convinced that the benefits of the program outweigh the potential damage done by manipulating short-term interest rates and sending mixed messages about the Fed’s long-term plans to end its accommodative monetary policy.

“A number of participants…indicated a preference for retaining a cap on the per-counterparty bid limit until the Committee has discussed possible approaches to medium-term policy implementation, and a few of these participants preferred to extend the exercise for a shorter period,” said the Federal Open Market Committee (FOMC) minutes from their January 28, 29 meeting. Hollenhurst points out that while increasing the ON RRP above 5 bp requires a majority vote of the FOMC, Fed chair Janet Yellen can increase the per-counterparty limits at her own discretion.