Overview
This series explains why Treasury repo capacity can become the binding constraint before commercial banks’ demand for reserves does. It separates aggregate liquidity—reserves plus ON RRP—from the cash and dealer intermediation actually available to finance private Treasury holdings. The chapters trace how coupon issuance raises funding demand, bills compete for MMF cash, and Federal Reserve balance-sheet changes alter both Treasury distribution and cash mobility; they then interpret conditional regression evidence and reconstruct September 2019 as a multiple-shock episode. The resulting diagnostic locates the constrained balance sheet and distinguishes private capacity, FHLB transmission, standing repo operations, and Treasury’s separate long-end buyback objective, without treating thresholds or coefficients as universal rules.
Learning outcomes
- Repo capacity is an allocation and intermediation outcome, not the same as reserves plus ON RRP.
- Coupon issuance tends to raise financing demand, while bill issuance can reduce MMF cash offered in repo.
- Lower liquidity relative to GDP is associated with greater issuance sensitivity, not a universal operating threshold.
- In September 2019, a $54 billion coupon settlement and tax-related outflows met low liquidity; SOFR rose over 280 basis points and EFFR reached 2.3 percent.
Keywords
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PlansFAQ
Why can repo capacity bind before bank reserves do?
Repo capacity can bind first when private Treasury financing demand becomes large relative to mobilizable cash and dealer intermediation, even while bank reserves remain above banks’ own demand boundary. Repo rates may rise before EFFR.
How do Treasury bills and coupon securities affect repo differently?
Coupon securities generally increase dealer or leveraged-investor financing demand, while bills can draw MMF cash away from repo. Both can raise repo pressure through different sides of the market.
What does a near-zero ON RRP balance change?
A near-zero ON RRP balance removes much of the nonbank cash buffer that MMFs can substitute into repo; expanding lending may then require deposits to move from banks, reducing reserves. It does not by itself set a universal threshold.
How can repo stress spill into the federal funds market?
Repo stress can spill into federal funds when FHLBs, which lend in both markets, shift cash toward more attractive repo returns. The markets remain segmented, so EFFR need not move one-for-one.