Reverse Repos Collapse Continues: What $91B at the Fed Is Really Telling Us

If RRP balances are collapsing—like they are now, under $100B—it means institutions are no longer parking cash at the Fed. Why? Two main reasons:

Reason 1: The System Needs the Cash Now

Institutions may be:

• Meeting margin calls

• Plugging funding holes

• Or simply hoarding cash in anticipation of trouble

Reason 2: There Aren’t Enough Treasuries Left to Go Around

The Fed supplies Treasuries into the RRP in exchange for cash. If the system:

• Is rehypothecating the same collateral over and over

• Is desperate for short-term Treasuries for repo transactions

• Is pulling high-quality collateral off-market to hoard or reuse...

Then institutions might not lend to the Fed—not because they don’t have cash, but because they need those Treasuries elsewhere. They need to keep the “good stuff” inside the system—not lend it away overnight.

A collapsing RRP balance means one thing: either there’s no cash to lend, or there’s no Treasuries left to post. Either way—it’s a liquidity warning shot.

Trust Is Breaking Down

Repo markets run on trust. I lend you cash, you post Treasuries, and we both go to sleep. But when that trust erodes, even “safe” overnight lending becomes dangerous. We’ve seen this before:

• Sept 2019: Repo rates hit 10%.

  • The Fed began injecting over a trillion in liquidity.

• March 2020: Panic transferred from the heartbeat of the system (repos) to the rest of the body (global markets).

• 2020–2025: Market’s reliance on overnight funding to function effectively has increased 178%.

Stealth QE didn’t start with COVID—it started with repo injections in 2019. And it never truly stopped. It just went underground and got bigger.

What’s Actually Happening

• Reverse Repo (RRP) usage is low
   → Institutions aren’t lending cash back to the Fed overnight.
   → This means they want to hold onto their cash—not because they have too much, but because they might need it.
   → It signals fear and cash-hoarding behavior.

• SOFR volume is high
   → Banks and funds are still borrowing huge amounts overnight just to function.
   → The system still needs liquidity badly—but it’s not coming from the usual places (like the RRP facility).

The Core Tension

• One part of the system is clutching its cash (not lending it out).

• Another part is starving for cash (still needing to borrow it daily).

That contradiction is the tug-of-war. Lenders are afraid to lend (RRP drops) while borrowers still desperately need funds (SOFR). It means the system is under strain—and the flow of money that keeps everything moving is starting to jam up.

When Rates Slip the Leash, the System Shows Its Teeth

When reverse repos vanish and trust between institutions erodes, the Fed begins to lose control over the one thing it’s supposed to command absolutely: overnight rates.

Because overnight liquidity doesn’t mean tomorrow. It means right now—the constant ebb and flow of money that keeps every bank, fund, and firm on Earth functioning minute-by-minute. If that river stops flowing?

• Balance sheets implode on paper.

• Even solvent institutions become illiquid.

• Panic spreads faster than the Fed can react.

And it’s happened before—always in whispers, before the headlines scream:

• Sept 2008: Lehman’s repo lines vanished. Funding dried up. The entire system locked up in days.

• Sept 2019: Repo rates spiked past 10% overnight. The Fed started injecting over $1 trillion—long before COVID ever entered the picture.

• March 2020: The "everything selloff." Treasuries, gold, equities—all dumped for dollars.

• Sept 2022: UK pension funds faced death-by-margin-call as long-dated gilts collapsed. The BOE had to intervene to save the system.

• March 2023: SVB’s failure triggered a regional bank crisis. The SOFR–OIS spread blew out. Banks hoarded cash like it was 2008.

• February 2025: Reverse repos dipped and stayed below $100B for almost the entire month. Explosive March-April sell off in markets followed.

And now?

• August 2025: Reverse repos have broken below $100B—for 3 out of the last 4 trading days. Overnight rates are flickering. Funding stress is whispering again.

When reverse repos vanish, it’s not because the system found something better—it’s because it’s breaking.

You can’t fix a debt crisis with more debt. You go back to what worked in the first place.

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Luke Lovett
📲 Cell: 704.497.7324
🌐 Undervalued Assets | Sovereign Signal
📧 Email: [email protected]

Disclaimer:
This content is for educational purposes only—not financial, legal, tax, or investment advice. I’m not a licensed advisor, and nothing herein should be relied upon to make investment decisions. Markets change fast. While accuracy is the goal, no guarantees are made. Past performance ≠ future results. Some insights paraphrase third-party experts for commentary—without endorsement or affiliation. Always do your own research and consult a licensed professional before investing. I do not sell metals, process transactions, or hold funds. All orders go directly through licensed dealers.