The Imperfect Intermediation of Money-Like Assets

We study supply-and-demand effects in the U.S. Treasury bill market by comparing the returns on T-bills to the policy rate on the Federal Reserve’s reverse repurchase (RRP) facility. We develop and test a simple model, where the RRP-bill spread is policed by both: (i) heterogeneously elastic money funds; and (ii) corporate treasurers who derive collateral benefits from holding T-bills. When T-bills initially become scarce and the spread widens, money funds act as the front-line arbitrageurs, and the effect of T-bill supply shifts on the spread depends on the elasticity of the marginal money fund. Eventually, when T-bills become extremely scarce and all money funds have left the T-bill market, the RRP-bill spread is entirely pinned down by corporate treasurers’ collateral demand function.