With another US debt ceiling debacle looming, I just realized something that runs against my intuition:

Many of the Treasury bills maturing in 6 months (with the exception of the ones maturing near and right after the debt ceiling becomes binding) are yielding lower than reverse repo (RRP) rate set by the Fed.

For example, the yield of the bills maturing in December 2021 are around 0.02% right now, e.g. according to quotes at https://www.wsj.com/market-data/bonds/treasuries. This is less than half of what you would get if you park money at the RRP facility at the Fed, which is 0.05% at the moment. (Of course, the exceptions being the bills maturing in Oct 2021, which are affected by the debt ceiling.)

It seems that over-night reverse repo, in which one deals with the Fed and receive Treasuries as colleterals, should be safer than investing in T-bills out-right, and RRP should yield lower than T-bills. Apparently this is not what's happening in the market, so I must be missing something!

I'd appreciate if someone can provide some insight into this!

One explanation I heard is market segmentation. T-bills market is open to the public, while Fed's RRP facility (and of course, IORB) is limited to a select number of counter-parties.

This begs the question: why should institutions who are eligible to use RRP facility hold any Treasury bills that are yielding lower than 5 bps?

OK I've almost convinced myself that this is due to market segmentation. There are investors who are ineligible to lend in the RRP facility, and have to buy bills, therefore pushing yields down.

  • $\begingroup$ "why should institutions who are eligible to use RRP facility hold any Treasury bills that are yielding lower than 5 bps?" - might relate to mandate or a desire to hold cash equivalents (bills) to meet redemptions? Hopefully someone more knowledgeable will chime in. $\endgroup$
    – user42108
    Sep 28 '21 at 21:47

Yes, it is definitely because of market segmentation. On one hand there are many funds, central banks, etc. who can buy treasury bills and cannot engage in repos.

On the other hand, entities which can do repo have a wider range of allowed assets and counterparties. They're not restricted only to treasury bills or only the Fed, so they can earn higher yields on other "relatively safe" assets with other "relatively high quality" counterparties.

  • 2
    $\begingroup$ You are looking at the demand side. You can also interpret it as a shortage of T-bills (not enough issued, partly because of the debt ceiling) that causes the prices of bills to be high (and the yields low). $\endgroup$
    – noob2
    Sep 29 '21 at 7:54
  • 1
    $\begingroup$ @noob2 Thanks for the comment. Now I should really read Vandeweyer. $\endgroup$
    – GZ-
    Sep 29 '21 at 16:00
  • $\begingroup$ Hi Si - I will accept the answer if there are no better ones in a month or so. I will continue thinking about it and perhaps post an answer if I find something more satisfying. $\endgroup$
    – GZ-
    Oct 4 '21 at 16:10

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