This post was originally published on this site
Cross-currency basis swaps, where euros and yen are exchanged for dollars, have maintained their stability. This stability is often disrupted at year-end as banks reduce overnight financing for transactions such as bond purchases to strengthen their balance sheets for regulatory compliance.
This year, however, substantial bank reserves exist due to higher rates applied to manage deposit outflows. The Federal Reserve’s contraction of its reverse repo facility has also contributed to pushing more money into the banking system.
The short-term funding markets are flourishing due to high yields on assets such as Treasury bills, repos, and commercial paper, which have exceeded 5%. The balances at the Federal Reserve’s reverse repurchase agreement facility have been rapidly reducing, with over $1 trillion withdrawn since June. This action has further strengthened the banking system and ensured high bank reserves despite the Federal Reserve’s ongoing quantitative tightening.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
