Inside Markets — Liquidity Stress Relief

Repo market stress during the government shutdown could have contributed to the recent weakness in equity markets. During a shutdown, the Treasury General Account (TGA) grows rapidly as Federal spending is delayed while revenues (taxes, fees, etc.) continue to flow in. This drains reserves in the banking system. Stress in the repo market (higher SOFR) results in pressure on equities as levered funds are unable to receive the same repo lines (now higher) that were previously available. Levered funds received this message from counterparty banks toward the end of October, which resulted in less risk taking. As we move forward, the unwinding of the TGA build and the end of the Fed’s QT in December should provide ample relief to the liquidity stress felt in markets these past two weeks.