The new and improved Standing Repo Facility (SRF) sprang into action for one day at quarter-end on June 30.

By Wolf Richter for WOLF STREET.

Total assets on the Fed’s balance sheet declined by $13 billion in June, to $6.66 trillion, the lowest since April 2020, according to the Fed’s weekly balance sheet today. Since peak-balance sheet at the end of QE in April 2022, the Fed’s QT has shed $2.31 trillion, or 25.7% of its total assets.

This completes the third year of official QT, and nothing has imploded yet, outside of a few regional banks in 2023. QT kicked off officially in June 2022 amid a massive surge of inflation. But the balance sheet had already started to decline in April, and by the end of May was already down $50 billion.

In terms of Pandemic-era QE, the Fed has shed 48.0% of $4.81 trillion in assets it had piled on from March 2020 through April 2022.

QT assets.

Treasury securities: -$3.8 billion in June, -$1.56 trillion from peak in June 2022 (-27.0%), to $4.21 trillion, the lowest since July 2020.

During pandemic QE, the Fed had piled on $3.27 trillion in Treasury securities. It has now shed 47.7% of that.

The Fed recently slowed the Treasury part of QT to just $5 billion a month. Included in the Fed’s Treasury holdings are $428 billion of Treasury Inflation Protected Securities (TIPS), of which $112 billion is inflation protection that TIPS holders receive and that is added to the TIPS balance to be paid when the TIPS mature. So the Fed’s TIPS balance grows with the inflation protection. In June, the Fed received $1.2 billion in inflation protection, which was added to the TIPS balance, which had the effect of reducing the roughly $5 billion in Treasury roll-off to $3.8 billion.

Treasury maturities, reinvestment, and roll-off.

Treasury notes (2- to 10-year) and Treasury bonds (20- & 30-year) mature mid-month and at the end of the month, and the Fed gets paid face value. The amounts vary widely from month to month.

If the Fed doesn’t do anything, its Treasury holdings will shrink by the amounts of those maturities each month.

To limit the monthly shrinkage of its holdings – and thereby the liquidity drain on the financial markets – it reinvests a portion of the proceeds into new securities that it buys at Treasury auctions.

The remainder “rolls off” the balance sheet and reduces the balance sheet. As of April, the roll-off has been lowered to $5 billion a month (red in the chart below). The remaining amounts of the maturing securities each month are re-invested in new securities.

So…

In July, $33 billion in Treasuries will mature. The Fed will reinvest $28 billion by buying new Treasuries at auction; and it will allow $5 billion to “roll off” the balance sheet.

In August, $71 billion will mature. The Fed will reinvest $66 billion and allow $5 billion to “roll off.”

In September, $17 billion will mature. The Fed will reinvest $12 billion and allow $5 billion to “roll off.” Etc. etc.

Mortgage-Backed Securities (MBS): -$17.7 billion in June, -$602 billion from the peak, to $2.14 trillion, where they’d first been in February 2021.

The Fed has shed 22.0% of its MBS since the peak in April 2022, and 43.8% of the $1.37 trillion in MBS that it had added during pandemic QE.

The Fed holds only “agency” MBS that are guaranteed by the government, where the taxpayer would eat the losses when borrowers default on mortgages.

MBS come off the balance sheet primarily via pass-through principal payments that holders receive when mortgages are paid off (mortgaged homes are sold, mortgages are refinanced) and as mortgage payments are made. But sales of existing homes have plunged and mortgage refinancing has collapsed, and far fewer mortgages got paid off, and passthrough principal payments to MBS holders have slowed to a trickle. As a result, MBS have come off the Fed’s balance sheet at a pace that has been mostly in the range of $14-18 billion a month.

The pace of the MBS reduction is not limited by the Fed. If pass-through principal payments were to become a torrent again during a refi boom, the Fed would re-invest any pass-through principal payments above $35 billion a month in Treasury securities, and total QT would reach $40 billion a month, the theoretical maximum under the current QT regime.

Bank liquidity facilities:

The Fed has three bank liquidity facilities. There was little activity in June. The Fed has been exhorting banks to start practicing using these facilities with “small value exercises,” or at least get set up to use them, and pre-position collateral so that they could use them quickly.

• Central Bank Liquidity Swaps ($37 million)
• Standing Repo Facility, or SRF ($0 million).
• Discount Window: $6.4 billion, up by $3.5 billion from a month ago. A year ago, it was at the same level. During the SVB panic, it had spiked to $153 billion.

The SRF swung into action on June 30 for one day. The weekly balance sheet presents the Fed’s holdings as of the close of business on Wednesday. The balance sheet is then published on Thursday afternoon. On today’s balance sheet, reflecting Wednesday July 2, the balance of the SRF was zero.

On June 30, at the end of the quarter, the SRF was active for one day and had an overnight balance of $11 billion. Those repos matured the next day and were unwound, and by the end of the day, the balance was back zero. On Wednesday July 2, the day of the Fed’s weekly balance sheet, the balance was also zero.

The Fed has been urging approved banks to use the SRF and has worked on improving it, including by adding a morning auction as of June 26 just in the nick of time for the quarter-end, in addition to the classic afternoon auction. The idea is that banks can draw on the SRF and then lend the proceeds to the regular repo markets when liquidity pressures push up repo rates above the Fed’s minimum bid rate (currently 4.5%), to profit from the spread.

And this apparently happened at the end of the quarter for one day. The daily SRF data from the New York Fed shows this action: $11 billion for one day on June 30.

The SRF was revived in July 2021, after Bernanke had killed it in 2009, and is designed to avoid another repo market blowout, like the one in the fall of 2019, when repo market yields exploded 10% as banks refused to lend to the repo market. To calm it down, the Fed then ended up undoing a big part of the 2017-2019 QT. This taught the Fed a lesson, and now it has the SRF to avoid that fate.

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