Overnight Reverse Repo (ON RRP)

Think of it this way

Imagine a reserve tank connected to a city's water network. While it is full, if someone needs water it is supplied from the tank and nobody notices anything. When the tank empties, every liter anyone asks for has to come out of the network, and that is when the pressure drops in every house.

What is Overnight Reverse Repo (ON RRP)?

It is a window where money market funds and other institutions leave their surplus money at the Fed overnight, in exchange for interest and a Treasury bond as collateral. Each transaction lasts one night, but that is misleading: the next day the fund leaves the money again, and the day after, and the day after that. What you need to look at is not the term but the BALANCE, which can stay at the same level for years. Between 2021 and 2024 more than a trillion dollars sat parked there without interruption, rolling over every morning.

How to read Overnight Reverse Repo (ON RRP)

The chart shows how much money is parked each day. A HIGH BALANCE means there is surplus cash and its owners are better off with the Fed's risk-free rate than lending it in the market or buying Treasury debt; it usually happens when few bills have been issued or when the market pays less than the window. It is idle money, which is why it is subtracted in net liquidity, but at the same time it is a cushion: as long as there is a balance, the Treasury can issue and the Fed can shrink its balance sheet without touching banks' accounts. A LOW BALANCE is not bad in itself; in fact it is normal: it means Treasury bills yield more than the Fed and money prefers to go there. What it implies is that there is no cushion left, so from that point on every Treasury issue and every dollar of QT comes straight out of bank reserves. A low balance only becomes dangerous when reserves are also falling: then there is nowhere left to draw from. Lag: none, or +15 days at most: the cash is already in the accounts.

What Overnight Reverse Repo (ON RRP) means for the market

This chart explains why the same liquidity figure weighs differently depending on the moment. WITH A BALANCE IN THE RRP, the Treasury issues debt and money market funds buy it by pulling money out of that tank: bank reserves are left untouched, and a season of heavy issuance passes almost without consequence. WITH THE TANK EMPTY, that same issuance comes straight out of reserves. Same deficit, same auction, opposite effects. That is why it pays to look at this chart before any other in the section: it tells you whether there is a cushion, and how everything else is read depends on that.

Where the money flows

From money market funds to the Fed, and back the next day. A fund ends the day with cash it does not know where to place, hands it to the Fed until tomorrow and receives a bond as collateral plus interest. While it lasts, that money is in no commercial bank. And here comes what almost nobody explains: WHY DOES THE FED PAY FOR THIS MONEY IF IT DOES NOT NEED IT? It does not borrow it to fund itself —a central bank does not need anyone to lend it its own currency— nor does it invest it in anything. In fact it does absolutely nothing with it: it hands over a bond it already had in its portfolio, keeps the cash, and that cash simply changes line within its own balance sheet, from bank reserves to reverse repo. Its assets do not move by a single dollar. What the Fed buys by paying that interest is CONTROL OF THE OVERNIGHT RATE. Banks already have a place to park cash and earn interest —their reserve account, which pays IORB— but money market funds cannot open an account like that. Without this window, a fund with surplus cash would have to lend it in the market at any price, and the overnight rate would sink below what the Fed wants. By offering them a risk-free place at a known rate, nobody lends for less. The interest it pays is the price of setting that floor, just like IORB, not the cost of a loan.

What to watch in Overnight Reverse Repo (ON RRP)

The peak was 2,554 billion in December 2022, and that figure is the reference against which to measure any balance. What you need to watch is the sustained direction, not a single day's reading: several weeks of increases mean money is once again in surplus and the cushion is being rebuilt; several weeks falling toward zero mean it is running out, and from then on Treasury issuance starts coming out of bank reserves. And do not be fooled by quarter-end spikes: they last one or two days, banks window-dress their balance sheets, and they disappear just as quickly.

If the RRP rises, money is being parked at the Fed instead of circulating.