Fed balance sheet sinks below $7 trillion, repo falls to zero

The U.S. Federal Reserve’s holdings of bonds and other securities fell on its fourth consecutive week, dropping below $7 trillion, while one key emergency liquidity measure slid to zero. The market took this as a sign that financial damages caused by the coronavirus pandemic have eased.

The Fed’s total balance sheet size fell $88 billion to $6.97 trillion as of July 8 from last week’s $7.06 trillion, its largest weekly decline in 11 years. The fall was mainly caused by the balance of outstanding repurchase agreements that dropped to zero from $61.2 billion from last week.

The central bank began interfering in the repo market in September after a deficit of bank reserves led to a rise in short-term borrowing costs. Absorption of the Fed’s repo operations declined over the past few months as markets steadied and Fed released additional liquidity measures.

The Fed also made repo operations slightly pricier over the past months, prompting banks to rely on private counterparties for their repo needs. This was evidenced by the lack of bids at the Fed’s overnight repo offering for the fourth straight day.