Wall Street is preparing for the risk of a liquidity crunch in the money markets at the end of the quarter. The accelerated issuance of US Treasury bonds in recent months has tightened liquidity in the financial sector, increasing investors’ expectations of volatility.
According to experts, there are concerns that a scenario similar to the repo market crisis of 2019 could occur due to technical factors, corporate tax payments, and coupon bond payments.
At that time, short-term borrowing rates skyrocketed, and the Fed intervened to provide emergency liquidity to the market.Although conditions are different today, the signals are noteworthy: The SOFR rate rose to 4.42% last week, reaching a two-month high.
Furthermore, the decline in the use of the Fed’s reverse repurchase agreement (RRP) from $2.6 trillion at the end of 2022 to $29 billion today makes bank reserves critically important. Citi analysts expect a decline in bank reserves in the coming months due to the increasing supply of T-bills, while Lou Crandall of Wrightson ICAP predicts that the use of the Fed’s emergency repurchase agreement (SRF) could reach $50 billion by the end of the quarter. Despite this, some analysts argue that the concerns are overly pessimistic. Jonathan Cohn of Nomura said, “The market is pricing in these risks already. Therefore, it is unlikely that end-of-quarter pressures will require Fed intervention.”
