Repo Markets and the Fed’s Balance Sheet: Implications for Monetary Policy Implementation

Claims Supported by This Source

1. The overnight government bond repo market trades over 8 trillion dollars a day.
2. Primary dealers borrow cash from MMFs to finance their holdings of government bonds (tri-party repo, approx. $1.5 trillion/day).
3. Repo rates determine the SOFR, which serves as a benchmark for trillions of dollars in contracts.
4. The size of the Fed's balance sheet is transmitted to short-term interest rates through the repo market.
5. The daily turnover in the tri-party repo market is about $1.5 trillion. The largest borrowers are primary dealers, who borrow cash from MMFs to hold the government bonds they buy at auction.
6. Demand side: borrowing by dealers and hedge funds to hold Treasuries. Supply side: assets under management by MMFs. On issuance days for coupon-bearing Treasuries, demand increases, putting upward pressure on repo rates.
7. Estimate: A $100 billion net issuance of coupon securities increases the repo rate by 3.9 bp, and bills by 1.3 bp. A $100 billion increase in dealer Treasury holdings increases it by about 6 bp. Daily changes in reserves + ON RRP do not directly affect spreads.
8. If liquidity is over 12% of nominal GDP, the impact of a $50 billion net issuance is less than 1 bp; if it is less than 10%, it is about 10 bp.
9. September 2019: Due to balance sheet runoff from October 2017 to August 2019, the ON RRP was near zero and reserves were below 9% of GDP. The settlement of $54 billion in coupon securities coincided with corporate tax payments, causing the SOFR to rise by over 280 bp to 5.25%, and the EFFR to reach 2.3%, exceeding the upper limit of its target range by 5 bp.
10. The December 2025 FOMC judged that reserves had fallen to an ample level and will maintain ample reserves by purchasing Treasury bills.
11. The Standing Repo Facility (SRP) allows dealers and banks to borrow from the Fed via repo, curbing upward pressure on repo rates.

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