Shenanigans Begin Again: Fed ‘Magic’ Turns $2.5BN Deposit Outflow Into $42BN Inflow

Banks usage of the Fed bailout fund as a free-money arb play ended this week with the BTFP facility ballooning to $168BN ($54BN of which could be in the ‘arb’)…

Source: Bloomberg

At the same time liquidity is being pulled from The Fed RRP facility (down $54BN this week), on target for the end of March as ‘Zero-liquidity’-day…

Source: Bloomberg

And after last week’s huge domestic bank deposit outflow (NSA), all eyes are on tonight’s Fed data for signals of stress.

Total bank deposits rose $51bn (on seasonally-adjusted basis) last week, pushing them to their highest since the SVB crisis…

Source: Bloomberg

On a non-seasonally-adjusted basis, total bank deposits also rose, but by just $9BN, leaving them still lower year-to-date…

Source: Bloomberg

But, and it’s a big BUT…

Excluding foreign banks, Domestic banks saw a $2.4BN (NSA) deposit OUTFLOW (Large banks +$5BN NSA, Small Banks -$7.4BN NSA) – the 3rd weekly NSA outflow in a row. and here’s the but – Domestic banks saw a $42BN (SA) INFLOW (Large banks +$33BN SA, Small Banks +$8.5BN SA)…

Source: Bloomberg

On the other side of the ledger, bank loan volumes increased for the second week in a row (Large banks +$4.5BN, Small banks +11.4BN)…

Source: Bloomberg

Finally, we note that without the help of The Fed’s BTFP, the regional banking crisis is back bigly (red line), and large bank cash needs a home – green line – like picking up a small bank from the FDIC…

Source: Bloomberg

And now you know why The Fed will cut rates in March – no matter what jobs or inflation is doing.

As we warned yesterday, watch the SOFR-O/N RRP Spread for signs of stress…

Key things to keep an eye on are re-increases in the RRP, indicating extra reserves are being taken back out of the system, or a rising take-up in the Fed’s standing repo facility, which would point to potential funding problems. All said and done, don’t put your spanner away yet, knowing how to plumb remains an essential skill.