US Rates Watch: FF rate drop: likely to be temporary

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US Rates Watch: FF rate drop: likely to be temporary

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US Rates Watch

FF rate drop: likely to be temporary

FF rate drop likely to be temporary 11 May 2026

The federal funds rate declined 1bp on Thursday driven by excess cash sitting on FHLB Rates Research

balance sheets & relatively easy funding conditions. We expect this FF rate drop to be United States

temporary as FHLBs reduce their FF lending & $55b in net settlements this week drain US Rates Research

excess cash into TGA. We review funding dynamics and discuss our outlook. BofAS

+1 646 855 8846

FHLB issuance has risen meaningfully YTD Mark Cabana, CFA

Rates Strategist

FHLB (dominant FF lender) has grown debt issuance in ’26 likely due to bank advance BofAS

demand (Exhibit 1, Exhibit 2). Advance demand has likely been driven by bank deposit mark.cabana@bofa.com

outflows and bank cash to asset ratios hitting 8y low (Exhibit 3, Exhibit 4). Advances Katie Craig

should show in 10% increase in domestic bank borrowings since mid-April (Exhibit 5). BofAS

katie.craig@bofa.com

Bank advance need around tax date -> lower FF volumes See Team Page for List of Analysts

Bank outflows were pronounced around the tax date (April 15). Banks likely tapped the

FHLBs for advances. FHLBs increased issuance via discount notes. Higher financing FF: federal funds rate

costs and FHLBs using excess cash for advances led a mid-April decline in FF volumes

and put upward pressure on FF. This was reflected in FF rate percentiles around the Apr FHLB: Federal Home Loan Bank

15th tax date (Exhibit 6, Exhibit 7). FHLB stayed high since tax date but is dropping.

IORB: interest on reserve balances

Elevated TGA post tax-date kept pressure on banks TGA: Treasury General Account