Overnight Reverse Repo

What Is the Overnight Reverse Repo?

The Fed's Overnight Reverse Repurchase Agreement (ON RRP) facility lets eligible counterparties — primarily money market funds, GSEs, and primary dealers — lend cash to the Fed overnight in exchange for Treasury collateral. The Fed pays an administered rate on these transactions, which was raised in line with the fed funds target.

Why It Exists

The facility prevents short-term money market rates from falling below the target band. During periods of abundant reserves (after QE), there is so much cash in the system that overnight rates would otherwise collapse toward zero or even negative. The RRP offers a guaranteed return and absorbs excess liquidity.

The RRP as a Liquidity Gauge

The RRP balance became one of the most-watched indicators of the post-pandemic cycle:

- **Peak ~$2.5 trillion (late 2022)**: Unprecedented liquidity surplus after COVID-era QE - **Rapid drainage from 2023**: As T-bill supply soared post-debt ceiling resolution, money market funds rotated from RRP into higher-yielding bills - **Approaching zero**: When RRP drains to near-zero, QT starts hitting actual bank reserves — the more structurally important and sensitive part of the liquidity stack

The TGA Connection

The Treasury General Account at the Fed competes with the RRP. When Treasury issues debt, cash flows from the private sector (often via money markets) to the TGA. This can rapidly drain RRP balances while also tightening private sector liquidity.

What to Watch

The weekly Fed balance sheet release (H.4.1) shows the RRP balance every Thursday. A rapid decline is not necessarily bearish if it is driven by bill supply absorption — but a decline toward zero with simultaneous reserve stress warrants attention.