Global Money Markets Signal Liquidity Strain

Something very troublesome is afoot.

Bloomberg via archive.ph

CNBC via archive.ph

The U.S. Federal Reserve is widely expected to cut interest rates when it meets on Wednesday with little to no room for a surprise. Any remaining excitement is centered on what the central bank will signal regarding its balance sheet and the path forward. Short-term interest rates have been particularly volatile in recent weeks, with the U.S. repo market signaling potential liquidity distress as it trades within a few basis points of the Fed’s upper limit, and in fact was above the top of the range Monday. The repo market is considered the plumbing of the U.S. financial system as it is the place where banks go for the overnight loans they use to fund operations. The rise in funding rates has raised questions over the state of bank reserves and led a number of analysts to bet on the Fed ending its quantitative tightening (QT) program earlier than expected. “We expect the FOMC to end its securities runoffs at this month’s meeting

Back to quantitative easing? And a uptick in inflation?

Pockets of global money markets are coming under strain as central banks have been pulling back easy money policies just as governments are boosting debt issuance, luring cash away from the financial system.
Key gauges of secured borrowing have risen in the US and UK, reaching levels not seen in years. While the drivers in each case may differ, the signs of tighter liquidity are flashing across markets.
The ripples suggest a normalization after years of central bank bond purchases flooded funding markets with excess cash. But investors are also wary of risks, such as a repeat of the spike in US short-term interest rates that rocked markets in September 2019 — prompting the Federal Reserve to pump half a trillion dollars into the financial system.
“Global money markets will all need to find their way in a world without excessive reserves,” said Michiel Tukker, a senior rates strategist at ING. “Although central banks now have many ways pump in liquidity if needed, the question is whether such liquidity will reach those in need.”

On Wednesday, the Fed said it will stop shrinking its Treasury holdings beginning Dec. 1, ending a three-year long effort after stress signals intensified. The Bank of England, meanwhile, is encouraging financial institutions to borrow cash from its revamped range of repurchase facilities to minimize the risks of excessive volatility.
Here’s an overview of the most important metrics from around the world:
US
The Fed’s main liquidity facility, the reverse repo facility, is nearly empty and bank reserves have dropped as the government is rebuilding its cash pile after raising the debt ceiling this summer while the central bank kept on tightening its portfolio.

If the Fed stops shrinking it’s holdings- does this mean they will increase or expand their holdings?

Tradable.com- Fed pumps 29.4 billion in biggest single liquidity move since dotcom bust

● Overnight repos let banks swap Treasury securities for quick cash when they need immediate funding. This massive spike suggests banks are facing real pressure to cover short-term obligations — likely tied to month-end balance sheet adjustments or sudden demand for Treasury collateral.

● What makes this notable isn’t just that repos happen — they’re a standard Fed tool — but the size and timing. After years of minimal repo activity, a $29.4 billion injection stands out.

● Historically, sudden jumps in Fed repo operations signal stress. We saw it in 2019 when the repo market seized up, and before the early 2000s downturn. Banks typically tap this facility when they hit temporary funding gaps or when Treasury market turbulence disrupts normal liquidity channels.

Economictimes.indiatimes.com

It’s the first major liquidity push of this scale since early 2020, the pandemic-era rescue phase.

Last time we were given a “pandemic” , military operation, this time bigger, expanded war?