US money market update: when in doubt, blame the BSD

Summary

• ‍This autumn there has been a notable tightening of US money market spreads. The tightening, it must be emphasized, is faster and stronger than expected. Secured rates have regularly settled above the Fed’s standing repo facility/discount window rate, which is supposed to act as a ceiling;‍
• In large part, the spread tightening is the result of the ongoing federal government shutdown, which has kept the Treasury’s balance at the Fed at a peak level for an extended period of time and drained reserves from the banking system – principally foreign-owned banks. When the shutdown ends, reserves should flow back to the banking system, and spreads should ease somewhat;
• ‍Still, for the Fed the writing is on the wall with regards to Quantitative Tightening. They will likely announce the end of QT at the October FOMC, which compares with my prior forecast for the December or January FOMC;‍
• Furthermore, I expect the Fed to soon resume asset buying at a low pace to satisfy the ‘natural’ growth in demand for bank reserves (please don't call it QE, because it really isn't). The Fed will employ the repo facility and the discount window to quell spikes in money market rates, not to manage the overall level of reserves.

Note: the prior US money market update can be found here.