The ON RRP Facility and Liquidity Fragility in Treasury Markets

Monetary policy implementation is usually judged by its control of overnight rates. This article documents that implementation regimes can also be associated with the distribution of liquidity within the Treasury market. We study the Federal Reserve’s overnight reverse repurchase agreement (ON RRP) facility, a liability-side instrument that gives money-market investors a standing alternative to private repo and short-term collateral markets. Using security-level Treasury data from 2014 to 2025, we document that Treasury Inflation-Protected Securities (TIPS) with low public amount outstanding carry larger liquidity discounts when ON RRP usage is elevated. The effect appears in real-yield residuals and quoted bid–ask spreads, survives a broad set of controls and robustness checks, and is stronger for TIPS than for nominal Treasuries. Asset-side Federal Reserve balance-sheet measures have larger standardized associations with Treasury liquidity, but ON RRP captures a distinct nonbank cash-intermediation channel. The evidence indicates that the functioning of safe-asset markets depends not only on the quantity of Treasury collateral but also on where money-market cash is allowed to sit.