Standing Repo Facility -$75 billion to zero, Reserve Management Purchases +$8 billion: The year-end liquidity shifts have settled down.
By Wolf Richter for WOLF STREET.
Total assets on the Fed’s weekly balance sheet dropped by $67 billion from the prior week to $6.57 trillion as of Wednesday, according to the Fed today. The drop, which was expected, reversed a big part of the $104 billion spike in the prior week when Wednesday, the cut-off for the Fed’s balance sheet, was December 31, the point of maximum year-end liquidity shifts.
That drop of $67 billion was caused by the Standing Repo Facility (SRF), whose balance dropped from $75 billion on December 31 to $23 billion on Friday January 2, and to zero on January 5 and stayed at zero through today.
The SRF is an asset on the Fed’s balance sheet, and that $75 billion uptake on December 31 happened on the day of the Fed’s weekly balance sheet, and so it increased the Fed’s total assets for one day by $75 billion. And that has been completely unwound.
These repos (repurchase agreements) at the SRF unwind the next business day, when the Fed gets its money back and the banks get their collateral back. Then the counter parties can take up new repos for another business day. But there has been no uptake since January 2.
The 43 or so approved counterparties at the SRF, mostly big broker-dealers and banks, can borrow overnight at the SRF via repos at 3.75%. The idea is that these counterparties will keep repo market rates from blowing out during liquidity shifts by lending to the repo market when rates in the repo market exceed the SRF rate and earn a quick profit from the spread.
On December 31, rates in the portion of the repo market that SOFR tracks rose as high as 4.0%, so banks borrowed $75 billion at the SRF for two days (including January 1) and lent to the repo market at higher rates, and profited from the spread. As rates in the repo market dropped below the SRF rate, the spread vanished, and banks unwound the SRF repos.
Treasury bill purchases. T-bills on the Fed’s balance sheet rose by $8 billion from the prior week, to $241 billion. T-bills are short-term Treasury securities with terms of 1 month to 1 year.
In December, the Fed started adding T-bills for two purposes, within its new effort to shift the composition of its balance sheet toward T-bills:
- Replace the MBS that come off its balance sheet to reach its goal of shedding all of its MBS over time;
- “Reserve Management Purchases” (RMPs) to increase reserve balances (bank cash on deposit at the Fed) as needed for reserves to remain at “ample” levels.
Until December, the Fed held only $195 billion in T-bills – only 3.0% of its total assets at the time. The only reason it had any T-bills at all was the repo market blowout in late 2019 when it purchased T-bills in addition to engaging in repos to bring that back under control. Before the repo market blowout, T-bills were at zero.
On December 12, the Fed started buying T-bills for RMP purposes and to replace MBS that come off the balance sheet.
Since then, the Fed added $46 billion in T-bills:
- $15 billion replaced MBS that came off its balance sheet
- $31 billion for RMP purposes.
When the Fed made that announcement in December, it said that RMPs for the month from December 12 to January 12 would amount to $40 billion.
The Fed will announce in a few days the amount of the RMPs to be purchased during the next 30-day period. The amounts will vary by season. The Fed is currently frontloading for April 15 Tax Day, when big liquidity strains are expected. After that it will slow the RMPs, it said.
Before 2008 and before QE, the Fed always let its balance sheet grow roughly with the nominal economy (at the time, largely a function of currency in circulation and inflation). It did so by purchasing T-bills and Treasury securities, and by engaging in repos. QE changed that in 2008, when the Fed suddenly began to balloon its balance sheet out of all proportion.
Note the growth of the Fed’s T-bill holdings before 2008 QE. This pre-QE method of letting the balance sheet grow roughly with nominal economic growth and shifting more of its assets to T-bills is what the Fed is reverting to.
From January 2003 to August 2007, the Fed’s total assets increased by 18%. That was not QE but standard balance sheet management, to keep the balance sheet in line with the economy.
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Think the 2nd paragraph should be December 31st.
Always appreciate your reporting efforts!
Thanks!
“President Trump said he was directing the purchase of $200 billion in mortgage bonds, which he framed as his latest effort to bring down housing costs ahead of the November midterm election.”
In response, the Fed should seize on this opportunity to sell $200 billion of mortgages on its balance sheet.
Trump will have to issue $200 billion in additional Treasuries to fund the purchases of the $200 billion in MBS. It may reduce the spread a tiny bit between MBS and 10-Year Treasury yields, but it will cause the government, in one form or another, to issue $200 billion in additional debt. And that might push the 10-year yield up a little. So it might reduce the spread a little, but to a higher 10-year yield. And then mortgage rates might not change much.
What that is actually doing is loading up Fannie and Freddie with MBS and mortgages, which was exactly what blew them up in 2008 when they carried $1.5 trillion in mortgages and MBS that went sour. They’re the mortgage insurer/guarantor. They carry all of the risk of those mortgages and MBS.
What duration do you think those “treasuries” will be Wolf? Smart money would guess T-bills?
Treasury has already said that it will further increase issuance of notes and bonds because they cannot fund all this new debt with T-bills. This means that the SHARE of T-bills will increase, but the amount outstanding of notes and bonds will also increase, just not as fast as T-bills.
Also, and I have discussed this in my articles: In December, for example, the $39 billion of 10-year Treasury notes sold at the auction replaced the $21 billion of 10-year notes that were issued in December 2015 and had matured. That’s how you need to look at it. $21 billion in 10-year notes matured and were replaced with $39 billion in new 10-year notes.
You should read these articles – I now do them monthly, after the 10-year and 30-year auctions:
https://wolfstreet.com/2025/12/12/us-government-sold-602-billion-of-treasuries-this-week-10-year-treasury-yield-bounces-back-to-4-20-30-year-yield-to-4-86-highest-since-sep-4-after-fed-cuts/
Will do Wolf. For those of us interested, are you keeping these reports under a specific tab/section on your front page?
This is a new feature, and I’ve done only three of them so far, one a month, around mid-month. You will recognize them by the headline, which will say something like: “Government Sold $X billion in Treasury Securities this week…”
You will be able to find the past ones in the category “Debtor Nation” where all my government-debt articles are (list of categories is in the left sidebar on your laptop, so just click on Debtor Nation):
https://wolfstreet.com/category/all/debtor-nation/
On your smartphone, there is a hamburger menu in the upper left corner. Tap it, which opens the menu, scroll down to Debtor Nation and tap it.
Wouldn’t that require Congress to appropriate the funds for Fannie, and then Treasury issues the new debt?
I realize that Mike Johnson is just a puppet, and it could pass, and the Constitution is merely a suggestion to Trump. But it would take time.
Raiding Fannie’s balance sheet seems like another alternative. I have no idea though whether that is feasible.
Reinforcing your comments, extract from AI
Quote:
the Fed’s shift from mortgage-backed securities (MBS) to Treasury bills (T-bills) while managing its balance sheet can support dollar stability by providing market liquidity, reducing uncertainty, and aligning its holdings with operational needs, ensuring smoother market functioning and reinforcing confidence in U.S. financial markets, which underpins dollar strength.
Unfortunately, with plans to increase military spending to 1.5 trillion, purchasing Greenland, buying MBS, and all kinds of crazy spending that does nothing for the average American, that’s going to be a massive T-bill issuance. LOL!
It’s almost as if there is an intentional plan to destroy the Federal Reserve Note…
CONgress is completely disconnected from the real economy. I wonder who will prevail? Place you bets…
We , the USA is NOT buying Grenland, nor are we taking it by military. We WILL negotiate for increased military bases and mineral rights.
Just watched a yearly roundup over at fidelity, interestingly one of the people mentioned that MBS are real hot right now.
Something about blah blah the high rated ones.
So we’re plowing THAT field again huh?
Wolf,
Because all the major broker-thieves have access to the SRF, do you think the SRF plays a role in keeping the SPAC market juiced? And to a lesser extent, the RMP’s as well? I mean, if the reserve requirement is zero, let those “ample” reserves drain.
SRF balance = ZERO = “ZERO.” How can it keep anything juiced with $0? They were $75 billion for just ONE DAY. And then back to zero. Since Jan 2, NO ONE has been borrowing at the SRF, and everything has been paid back. Look at the chart!
Any comments on the latest Trump edict?
As the Fed allows MBSs to mature and run off the balance sheet, Fannie and Freddie to buy $200 Billion of MBSs.
“Any comments on the latest Trump edict?”
All you have to do is READ it:
My reply to JeffD yesterday, just above your comment:
“Trump will have to issue $200 billion in additional Treasuries to fund the purchases of the $200 billion in MBS. It may reduce the spread a tiny bit between MBS and 10-Year Treasury yields, but it will cause the government, in one form or another, to issue $200 billion in additional debt. And that might push the 10-year yield up a little. So it might reduce the spread a little, but to a higher 10-year yield. And then mortgage rates might not change much.
What that is actually doing is loading up Fannie and Freddie with MBS and mortgages, which was exactly what blew them up in 2008 when they carried $1.5 trillion in mortgages and MBS that went sour. They’re the mortgage insurer/guarantor. They carry all of the risk of those mortgages and MBS.“
Apologies…but I posted prior to Jeff and was delayed awaiting approval from moderator
“Trump will have to issue $200 billion in additional Treasuries to fund the purchases of the $200 billion in MBS”
Is this accurate? General reportage made it sound like Fannie/Freddie have $200B+ in retained earnings that would pay for this.
“General reportage” is frequently wrong but I thought it worthwhile to ask for confirmation.
Kinda matters because 1) paying for it out of F/F retained earnings doesn’t add to money supply but 2) paying for it out of new issue Treasuries has much greater probability of necessitating money supply growth at some point (Fed acting as perpetual money-printing backstop for perpetual fiscal deficit increasing Treasury…)
“retained earnings” (stockholder equity) don’t matter. That’s just an accounting entry. Do they have $200 billion in “cash” that they can use to buy securities with?
Fannie Mae’s Q3 financials (10-Q):
$3.9 billion quarterly net income
$12 billion in cash
$27 billion in “restricted” cash that it cannot use
$61 billion in repos
But it needs lots of cash to operate because it buys mortgages with cash, holds them for a while, pools them into mortgage pools, and sells the MBS to investors, when it gets that cash back, to buy more mortgages with.
It had $4.08 trillion in mortgages in those mortgage pools (an asset on its balance sheet)
It had $4.08 trillion in debt (the other side of the MBS it issued) associated with those mortgage pools.
Total stock holder equity is $105 billion, for $4.23 trillion in liabilities. Fannie is among the most leveraged entities out there.
Given the complete disconnect and irresponsible behavior by this administration and congress, the fed is quickly becoming irrelevant.
Hedge accordingly.
Add in, Congress just approved the extension of temporary Covid subsidies to Obamacare on to top of the existing Obamacare subsidies. 17 Republicans went along with the Dems. No one cares about the deficit anymore.
Wolf,
It may be prudent to remind your readers of the bank bail in provision of the Dodd Frank act, because that is how i believe they will handle the next crisis.
1. The banks have shed nearly all of the residential mortgage risk to the government. So there will not be a repeat of the mortgage-and-banking crisis. That is one of the biggest changes coming out of the financial crisis. So maybe there will be another crisis, somewhere else, private credit, etc.
2. Everyone knows that depositors are “unsecured” creditors, meaning they have no right to collateral if the bank fails. But depositors are “insured” within the limits of the FDIC.
So who got “bailed in” at the bank collapses in 2023? INVESTORS. That’s how it always should be. The FDIC takes over a bank, and shareholders and preferred shareholders lose 100%. It’s not their bank anymore. FDIC then instantly pays the insured depositors up to the insurance limits, sells all of the bank’s assets over time (loans, securities, buildings, etc.), and with the proceeds pays the uninsured depositors, who may or may not get a haircut of some sort, such as getting 80 cents on the dollar for their deposits.
What was new in 2023 is that ALL depositors got deposit insurance from the FDIC without limit. But investors were still bailed in 100% and lost everything, while depositors lost nothing.
I don’t like the way it was done, but I do think Congress should just remove the FDIC cap. I think it’s silly.
It looks like Trump got what he wanted, which was a knee jerk reaction by the bond market algos to buy MBS. I guess the question is how long it lasts