Is the U.S. market facing a "September liquidity drain"?
Barclays predicts that due to the reconstruction of the U.S. Treasury's accounts, quarterly tax payments, and bond settlements, bank reserves will sharply decline to below $3 trillion in September, leading to tighter liquidity. However, the risk of a severe "funding squeeze" is low. This is mainly due to the market's stable absorption of previous Treasury bond issuances, and the Federal Reserve's standing repurchase facility provides a strong safety net, with total reserves expected to remain at a sufficient level above 11%
As the end of summer approaches, a massive liquidity withdrawal triggered by the U.S. Treasury, tax, and bond settlements is looming over the U.S. money market.
According to news from the Chase Trading Desk, Barclays released a research report on August 14, indicating that the market will face a sharp consumption of reserves in September, particularly with a significant liquidity shock point expected around mid-month. However, the core view of the report is that despite the large and rapid scale of the "withdrawal," the likelihood of a systemic financing crisis being avoided is high due to the market's demonstrated resilience and the Federal Reserve's deployment of key backup tools.
Source of the "Big Withdrawal": Three Overlapping Factors
The report analyzes three main driving factors that will lead to a sharp decline in reserves in September. The combination of these factors, especially around mid-month, will pose a severe test.
- Reconstruction of the Treasury General Account (TGA): The Treasury plans to restore its cash balance at the Federal Reserve (TGA) to a target level of $850 billion. This process itself will withdraw liquidity from the banking system.
- Quarterly Tax Payments: September 15 is the deadline for quarterly tax payments. Barclays expects that on this day alone, corporate tax payments will lead to approximately $100 billion or more flowing into the TGA, with another $30 billion on the 16th.
- Treasury Interest Payments Settlement: At the same time, there will be about $80 billion in net coupon settlements on September 15, with over $100 billion in settlements at the end of the month.
The report clearly states that on September 15 alone, the combined impact of taxes and bond settlements could withdraw nearly $200 billion in reserves from the banking system. This will cause the total reserves to fall below $3 trillion in mid-September and further decline to below $2.9 trillion by the end of the month.
Why Can the Market Maintain Resilience?
Despite the seemingly overwhelming liquidity shock, Barclays believes the market is prepared to cope with the situation.
First, the market has demonstrated its absorption capacity. The report mentions that in August, the market "calmly" digested up to $350 billion in net short-term Treasury issuance, while the secured overnight financing rate (SOFR) only rose slightly.
Second, the pace of Treasury issuance will provide a buffer in the second half of September. The report points out that the net short-term Treasury issuance in September will be relatively moderate, around $30 billion. More importantly, as the cash management bills (CMBs) issued in early July mature, the net issuance in the second half of September will turn negative, which will somewhat offset the liquidity tightening brought by mid-month tax payments.
The Federal Reserve's "Safety Net": Key Backup Tools
Barclays believes that the Federal Reserve's Standing Repo Facility (SRF) is key to eliminating tail risks in the market. This tool allows eligible counterparties to borrow cash from the Federal Reserve at a fixed rate when needed, thereby providing a reliable liquidity ceiling for the market The report emphasizes that the Federal Reserve has been working to enhance the effectiveness of the standing repurchase facility, such as adding a morning operation window before the end of the quarter in June to lower the threshold for institutions to use it. Market participants have also shown a willingness to use this tool.
Additionally, the report mentions that the Federal Reserve's toolbox includes term repurchase operations. Given the fluctuations in the Treasury account, the Federal Reserve may introduce term repurchases at the upcoming quarter-end or year-end to provide longer-term liquidity support.
Risks Priced In, But Vigilance Is Necessary
For investors, the core question is whether these risks have been absorbed by the market.
The report analyzes that although the ratio of reserves to total bank assets will fall below 12%, it is expected to remain slightly above the "adequate level sweet spot" of 11% as identified by Barclays. While this is a low level that has never been reached in this cycle, it has not yet entered the danger zone.
From the perspective of market pricing, the September interest rate futures market indicates that the secured overnight financing rate (SOFR) is expected to be about 4 basis points higher than the federal funds rate. Barclays considers this a "fair" pricing, as its own forecast is 3 basis points higher, indicating that the market price already includes a certain "insurance premium" to cope with mid-month reserve declines and quarter-end volatility.
In summary, Barclays' report conveys a clear message: the liquidity tightening in September will be severe and rapid; however, due to the existing resilience in the market and the Federal Reserve's strong backup support, the risk of systemic funding tightening is low.
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