The past has shown us the Federal Reserve (Fed) does an excellent job of alleviating market stress but does not necessarily take actions to prevent it. The second quarter could, yet again, be one of those periods as short-term Treasury bill (T-bill) yields hover at zero and Overnight Repurchase Agreements trade at negative rates. Will the Fed make a technical adjustment to their Reverse Repurchase Program (RRP) rate to prevent prolonged negative market rates?
As we look towards the second quarter of 2021, the abundance of liquidity will continue to challenge very short-term rates. T-bill and overnight repurchase agreements (repo) yields are hovering at all-time lows and are poised to turn negative. The Fed is aware of this challenge but will be slow to react. As we have observed over time, the Fed does an excellent job of alleviating market stress but does not necessarily take actions to prevent it. At their March meeting, the Fed announced they would raise the allowable allocation of the RRP up to $80 billion from $30 billion, a move that was critical in order to accommodate the extraordinary growth in government money market funds.