What Happens to HY Credit Spread (OAS) When the Fed Reverse Repo Facility Drains to Zero?
What happens when the Fed RRP facility drains? Liquidity implications, money market dynamics, and impact on bank reserves.
How HY Credit Spread (OAS) Responds
Scenario Background
The Fed's overnight reverse repo (RRP) facility allows money market funds and other eligible counterparties to deposit cash with the Fed at the administered rate, earning a risk-free return. RRP balances peaked at $2.5T in late 2022 as excess liquidity accumulated in money markets post-COVID stimulus. As these balances drain, funds flow back into T-bills, repo, and bank deposits, with important implications for liquidity.
Read full scenario analysis →Historical Context
RRP balances ranged from $0-$400B before 2021, spiked to $2.5T in late 2022, and began draining in 2023 as T-bill supply expanded and rates rose. By early 2024, balances had declined to roughly $400B, freeing liquidity for Treasury absorption. Similar dynamics in 2018-2019 saw reserves drain aggressively, culminating in the September 2019 repo spike that forced the Fed to restart balance sheet expansion.
What to Watch For
- •RRP balance below $200B
- •Bank reserves declining below $3T
- •SOFR-IORB spread widening
- •Treasury bill supply continuing to expand
- •Fed statements signaling possible QT adjustment
Other Assets When the Fed Reverse Repo Facility Drains to Zero
Other Scenarios Affecting HY Credit Spread (OAS)
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