Federal Reserve Board research finds money market funds reallocate from ON RRP to private repo at near-zero spreads

The Federal Reserve Board published a FEDS Note analyzing how money market mutual funds (MMFs) shifted cash between the overnight reverse repurchase (ON RRP) facility and private overnight, Treasury-collateralized repo during balance sheet runoff. Using transaction-level repo microdata, the note finds MMFs have generally been willing to move out of ON RRP when private repo rates are at, or only marginally above, the ON RRP offering rate, suggesting they did not require a meaningfully large rate premium to reallocate into the private market. ON RRP take-up stayed above USD 2 trillion from June 2022 through May 2023, peaking at a monthly average of USD 2.3 trillion in April 2023, before falling sharply as MMFs drove over 95 percent of the decline; by November 2024 month-end, take-up had fallen to USD 198 billion, with MMFs reducing ON RRP usage by roughly USD 2 trillion. The analysis identifies about USD 750 billion of direct substitution from ON RRP into private overnight repo since June 2022 and shows net reallocations concentrated at spreads of 0 to 3 basis points above the ON RRP rate, with most volume occurring at a zero spread; a smaller amount occurred at negative spreads, consistent with MMFs maintaining dealer relationships, particularly in tri-party repo. The note concludes that modest rate spreads have been sufficient to support continued ON RRP outflows, although the pace could also depend on factors beyond rates, including private repo capacity, MMF counterparty limits, and preferences to retain flexible balances in ON RRP until term options emerge.