Fed’s T-bill pivot expected to ease supply, but rate futures flag tight funding

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The Federal Reserve’s decision on Wednesday to begin winding down its long-running balance sheet runoff has done little to ease concerns about near-term liquidity strains in the roughly $4 trillion U.S. overnight repurchase market.

U.S. repo futures continue to reflect expectations of elevated overnight funding rates over the next two months, despite the U.S. central bank’s announcement that it will reinvest all proceeds from its maturing mortgage-backed securities (MBS) into Treasury bills. Analysts estimate the reinvestment will amount to $15 billion in T-bill purchases per month.

In halting the drawdown of its still-sizable balance sheet, the Fed cited signs of tightening liquidity that have driven repo rates higher over the past few mo