Federal Reserve Board research finds repo rates are becoming more sensitive to Treasury issuance as quantitative tightening continues

The Federal Reserve Board published a FEDS Note analysing why Treasury repo rates have risen relative to the overnight reverse repurchase agreement (ON RRP) rate and become more volatile, focusing on how quantitative tightening (QT) changes repo-rate sensitivity to net Treasury issuance. The note finds that sensitivity increased during the 2017–19 QT episode as the balance sheet shrank and liquidity declined, and while sensitivity has been mostly small and statistically insignificant during the current QT episode, it has been rising over the past six months, consistent with some tightening in repo market conditions. Using daily changes in the spread between the tri-party Treasury repo rate (TGCR) and the ON RRP offering rate, the authors estimate sensitivities to changes in Treasury coupon and bill amounts outstanding (proxies for net issuance). In the most recent quarters, the estimates imply that a USD 100 billion increase in Treasury coupon issuance widened the TGCR–ON RRP spread by around 5–6 basis points, still well below levels observed late in the prior QT episode, which the note interprets as consistent with liquidity remaining abundant. Results are similar when excluding quarter-end dates, suggesting changing dealer balance sheet constraints are not driving the pattern, and specifications that interact issuance with measures of Fed-provided liquidity indicate that higher reserves and higher ON RRP take-up each dampen issuance-related repo-rate sensitivity, with the liquidity effect more pronounced for coupon issuance than for bill issuance.