U.S. Banks Tap $1.5 Billion Fed Repo Facility Amid Funding Strain

U.S. Banks Borrow $1.5 Billion from Fed’s Repo Facility Amid Tax and Debt Settlements

U.S. banks tapped into the Federal Reserve's Standing Repo Facility (SRF) for $1.5 billion on Monday, marking a significant but relatively modest use of the tool during a period of heightened financial activity. This borrowing occurred on the deadline for quarterly corporate tax payments and major Treasury debt settlements, highlighting potential liquidity challenges faced by financial institutions.

The SRF was introduced in July 2021 as a safety net to address possible funding shortfalls in the financial system. It allows banks and other institutions to access overnight cash twice daily in exchange for high-quality collateral such as U.S. Treasuries. The facility is designed to ensure stability in the money market, particularly during times of stress or increased demand for liquidity.

On Monday, the timing of the corporate tax deadline coincided with a large-scale Treasury security settlement for recently issued debt. According to data from Wrightson ICAP, approximately $78 billion in payments were due to the Treasury, contributing to an overall increase in the U.S. Treasury’s cash balance to over $870 billion.

Financial institutions borrowed $1.5 billion in the morning, but no additional funds were accessed in the afternoon. This contrasts with June 30, when banks borrowed about $11.1 billion from the SRF, the largest amount since the facility’s launch four years ago.

Steven Zeng, a U.S. rates strategist at Deutsche Bank, noted that the limited use of the SRF on Monday aligns with expectations. He suggested that elevated repo levels may have allowed some banks or dealers to source funds from the Fed and lend them out for a return.

Zeng also pointed out that cash was tight on Monday due to reduced excess liquidity in money market funds. These funds have been allocating more capital to Treasury bills and holding back cash for redemptions ahead of the tax deadline.

Rising Repo Rates Signal Increased Demand for Secured Funding

Ahead of the tax and settlement dates, repo rates—such as the Secured Overnight Financing Rate (SOFR)—rose above the interest paid on bank reserves. SOFR, which reflects the cost of borrowing cash overnight backed by Treasuries, reached 4.42% on Friday, matching the highest level in two months. In contrast, the Interest on Reserve Balances (IORB), the rate banks earn for holding reserves at the Fed, currently stands at 4.40%.

Typically, SOFR should remain at or below IORB because banks can always park money risk-free at the Fed. However, when SOFR exceeds IORB, it indicates unusually strong demand for secured funding against Treasuries, often seen around major Treasury auction settlements.

Teresa Ho, managing director and head of short duration strategy at JPMorgan, highlighted that while higher SOFR levels were expected, "the magnitude somewhat caught us off guard." She added that although markets have generally handled the increased supply of Treasury bills, the shift from repo to T-bills has accelerated, with money market funds extending their weighted average maturities in anticipation of potential Fed rate cuts.

Temporary Liquidity Pressure Expected

Analysts believe that the current liquidity pressure is temporary and not indicative of a broader systemic issue. Lou Crandall, chief economist at Wrightson, stated that the funding conditions observed on Monday reflect typical incremental pressure associated with a major Treasury coupon settlement date and a quarterly tax deadline, rather than a disruptive funding squeeze.

The situation underscores the interconnected nature of the U.S. financial system, where factors like tax deadlines, Treasury settlements, and monetary policy decisions can influence liquidity dynamics. While the SRF serves as a critical buffer, its limited use on Monday suggests that the financial system remains largely stable despite the increased demand for cash.