As T-bill yields climb, Fed’s reverse repo facility shrinks to lowest level in 1½ years

Yields on Treasury bills pushed above 5.4% on Tuesday to top what investors can earn by parking cash at the Federal Reserve’s reverse repo facility, according to Tradeweb data.

This chart shows the sharp increase in one-month
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to one-year Treasury Treasury yields
BX:TMUBMUSD01Y
since January 2022, in the months before the Fed began to dramatically raise its policy rate to stomp out high inflation.

T-bills are U.S. government-issued securities that mature in a year or less. The Fed’s policy rate in July was increased to a 5.25% to 5.5% range, the highest in 22 years, helping push bond yields higher.

Of note, bill yields jumped the most on government securities that mature in one month, two months and three months
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over the past year, up more than 100 basis points, according to Tradeweb.

Yields on the four-month, six-month
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and one-year bills also gained roughly 69-81 basis points in the same stretch.

An elevated fed policy rate helped lift all six series of Treasury bills above 5.4%, according to Tradeweb data, whereas the Fed’s overnight reverse repo rate has been steady at 5.3% since July 26, when the central bank last hiked rates.

Loftier Treasury yields have enticed money-market funds and other investors into short-term government bills, a place many park cash over the short term to earn a return.

Read: Higher Treasury yields are giving stocks a run for their money

At the same time, overnight demand for the Fed’s reverse repo facility has been dropping, signaling less need for a key cog in the plumbing of financial markets over the past two years.

Demand for the facility peaked at slightly more than $2.5 trillion in December, but had dropped below $1.49 trillion on Tuesday, the lowest level since March 2022, according to New York Fed data.

Also pushing up Treasury-bill yields has been a deluge of new supply to refill coffers run low by the U.S. debt-ceiling fight. In August, the Treasury raised its expected borrowing need to $1 trillion for the third quarter.

Read next: U.S. budget deficit will double this year to $2 trillion, excluding student loans, CBO says

See: Why the deficit is a ‘big time’ worry

Stocks
DJIA

SPX
closed lower on Tuesday, with Apple’s
AAPL,
-1.71%
release of its latest iPhones and other consumer products failing to lift technology stocks. The benchmark 10-year Treasury yield
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was near 4.263% Tuesday.

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