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Let’s continue game theory on what US banks should do right before BTFP expires. Let’s be extreme.
Assume every eligible bank repos their entire treasury and mbs position, which is ~$4tn, at par. They are essentially paying Fed funds of 5.5%.
Now they have $4trn of cash what do they do? This needs to be a relative risk free arb.
I can’t think of anything easy to do with this cash. Which leads me to believe BTFP balances might grow a bit pre Mar 11, but not that much. The Fed closed the risk free arb, so if you a bank that’s healthy *now, why use the BTFP.
But if Powell doesn’t deliver on rate cuts, qt taper or qe restart, banks go from healthy to insolvent as bond market sells off. And now after Mar 11 there is no more BTFP.
What do y’all think?
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