- The government shutdown pushed the Treasury General Account (TGA) above $1 trillion, draining Fed reserves and intensifying overnight funding pressures.
- Elevated SOFR and repo rates signal persistent volatility, with upcoming Treasury refunding announcements key to future liquidity direction.
- Low reserve balances and ongoing volatility suggest markets may face turbulence similar to late 2018, despite brief, limited relief ahead.
Market liquidity has dried up, with no immediate relief expected, leading to significant stress across risk assets and funding markets, writes Seeking Alpha.
The government shutdown has worsened the problem somewhat, because while we knew that the Treasury General Account would rise by more than $500 billion back in July to around $850 billion by the end of September. What we didn’t know was that the government shutdown would drag on for weeks, pushing the TGA to over $1 trillion and the Fed’s reserve balances to below $2.9 trillion.
This has created stress in the overnight funding market, pushing borrowing costs significantly higher. The secured overnight financing rate [SOFR] as of October 30 was 4.04%, above the upper end of the effective federal funds rate at 4% and 17 basis points above the Fed’s effective funds rate, historically a wide spread.
The average Treasury repo rate at DTCC also soared to 4.29%, almost 39 bps above the interest on reserve balances, which the Fed had just lowered to 3.9% following the 25 bps rate cut on Wednesday, October 29. Liquidity conditions on Friday were very tight, and SOFR is likely to be very high when the data comes on Monday.