The Fed actually did the opposite back in June of 2021 and raised the award rate of the RRP from Fed Funds minus 5bps to Fed Funds plus 5bps. That made sense at the time since rates were at .00. When they increased rates in January, and each time since, they’ve left the award rate at 5bps higher. I expect the Fed to lower the award rate to 5 below at some point, probably when they think rates are high enough to pause right their tightening for a bit.

As for decoupling and making the award rate really low, no, I don’t think that would ever happen. There is a purpose for the operation and decoupling it from Fed funds would make the operation useless. That goes the same for the SRF/RP operation. They’d never decouple that from Fed funds either.

And you are correct, the main users of the RRP are money market funds. The data is available, I made this screenshot awhile ago to explain why it’s not banks https://imgur.com/a/fjmD7eC and you can see from the results that it’s 90+% money market funds. These funds don’t lend to anyone.

Thank you for the kind words. Having traded repo for basically my entire career, I had a job doing something that 99.9% of the world doesn’t know about. I make this comment all the time, and it’s honestly not a joke, but for the first few years, my mother was convinced I had something to do with taking people’s cars. It’s not a well understood profession, mostly because it’s kind of basic. To use an analogy, no one looks at a home and wonders who did the plumbing. They’ll ask who the builder was or who the architect was or who did the interior design. But no one asks about the generic tradesmen who did the guts.

Repo is basically the guts of the fixed income market. No one will ever make a movie about repo like they did with the Big Short, Wall St., or Margin Call or a few others. It’s simply not sexy enough. Thus, those who aren’t involved directly with the fixed income market will rarely know how it works or what it’s impact is. However, if you were to read about the last days of Bear or Lehman, you’d find out that their last days were dictated by the end of their repo liquidity. Both of those top 5 fixed income firms (at the time) had to close shop when they could no longer fund themselves, which they do from repo. Just like a house would become uninhabitable if their plumbing would be irrevocably damaged.

It’s very easy to make theories about processes/functions that one doesn’t understand, it’s human nature. It happens consistently with repo, in particular the RRP. I can, and have, spoken ad nauseam about how meaningless the attention to the RRP is, but the shear size of the number outweighs all the facts I can provide.

My salvation from this shall be when the Fed or market decides that the tightening cycle has ended and we see MMFs extend out the curve, drastically lowering the daily RRP use. Those that have provided alternative theories as to the importance of the RRP number will have to then justify how their theory coincides with its drop. I’ve yet to see a “theory” that will allow for this to occur. And then the myths of the RRP importance will be, to quote the Bard, “full of sound and fury, signifying Nothing.”

This number has gained a lot of attention due to its size however it’s relevancy to anyone outside of Money Market Funds is basically zero.

MMFs started using it back in 2021 because it offered the same yield as they would get from buying 1-3 month bills, which is what they usually do. Simple logic, why invest in 1-3months when you can get the same yield overnight.

When the Fed increased rates, which made the RRP yield less than the longer term, MMFs didn’t move out the curve. Why? Because the Fed was in a tightening mode, much riskier for a MMF to lock in term if the Fed continues to aggressively tighten (which they’ve been doing). In June you could have bought 6month paper at 1.25 when the RRP was .80. Would have looked good for a couple days but then the Fed has tightened another 225bps since then making that 1.25% purchase awful and still on the books until December.

Banks don’t use the RRP, there usage is under 1% historically and basically zero lately. You can look at the historical data and see this. I haven’t updated this pic in awhile but you’ll get the point…

https://imgur.com/a/RMTwD6M