Reverse Repo Demand Surges As Quarter Ends

Total bids for the Federal Reserve's reverse repo program surged to $407.17 billion on Tuesday amid heightened demand at the end of the quarter. The amount of submitted bids exceeded the total size of the program for the first time since the central bank capped allocations at $300 billion during its September policy meeting. Money market funds and other financial institutions lend cash to the Fed overnight through the reverse repo program in exchange for a low amount of interest, thereby draining reserves from the financial system as part of an eventual effort to raise interest rates. With the size of the program now capped, the excess demand pushed down the reverse repo rate to 0%, below the target of 0.05%. Investors bid at a rate that ranged from 0.05% to negative 0.20%, meaning they would actually pay the Fed to park cash there. Demand rises as the quarter ends because "dealers typically pare positions for balance sheet dressing purposes," giving money market mutual funds extra cash to put to work, according to Ray Stone, of Stone McCarthy Research Associates. Read more: Fed exit may be bumpy ride for investors.