The New York Fed disclosed today that its overnight reverse repos (RRPs) spiked by $208 billion from yesterday, to a record $1.904 trillion. With these RRPs, the Fed took in $1.9 trillion in cash from 103 counterparties, and in exchange handed out Treasury securities, temporarily draining $1.9 trillion in liquidity from the market and financial system.

With RRPs, the Fed takes in cash and hands out Treasury securities in order to put a floor under short-term interest rates.

The counterparties are financial institutions that are creaking under excess liquidity that the Fed has created with its monstrous QE, and this cash was showing up in money market funds. The funds then needed to invest this flood of cash in short-term securities, such as Treasury bills. This flood of buying caused short-term Treasury yields to turn negative. That’s when the Fed offered to take this cash via RRPs. It when it offered to pay interest at an annual rate of 0.05%, cash came gushing into the Fed’s direction, and Treasury yields bounced back above 0%.

Fed Drains $1.9 Trillion in Liquidity from Market via Overnight Reverse Repos | Wolf Street