Reverse Repo Plummets By $314 Billion In First Massive Liquidity Injection Of 2024

Last Friday, as is customary on the final day of the quarter and year, banks engaged in rather aggressive liquidity "window dressing" as a result of which the Fed's Overnight reverse repo facility shot up above $1 trillion for the first time since early November, up from $830 billion the day prior, and up $300+ billion from the $683 billion low hit on Dec 15. It was this sudden spike in reverse repo - which is a drain on liquidity - that sent the spread between SOFR and the effective Fed Funds rate to the highest level since the March 2020 repo crisis, signaling an immediate blockage in the plumbing of the US financial system if not resolved within days if not hours.

That, we said, was "the bad news." However, we noted that "the good news is that come 2024 in a few hours, and specifically the first day of trading on Jan 2, we expect the reverse repo facility to plummet back to $700 billion once the year-end window dressing is over (especially with total US debt rising above $34 trillion to start the year), and floods the system with fresh liquidity which will stabilize the monetary plumbing at least until reverse repo dips below that key level of $700 billion at which point we expect the SOFR spikes to become a daily occurrence, and one which the Fed will no longer be able to ignore."