Liquidity Drains
Capital Gains Taxes, TGA, BTFP expiry, RRP floor — and how Yellen may navigate it all
A note on liquidity with a disclaimer up front: I am not writing this from any sort of position of interest rate authority or deep expertise, but rather floating a theory. There are Liquidity Bros far more in the weeds than I, many of whom are sharp.
TL:DR — I have a bad take on liquidity, and damnit if I won’t throw mine on the growing pile of them!
There is a small appendix at the end for those who need my brief primer on liquidity/acronyms.
Several respectable thinkers have commented that markets are on the verge of a nasty liquidity drain. Namely, the TGA will pop on a few hundred billion in capital gains tax payments (somewhat offset by refunds) that are due April 15th, draining liquidity. As a consequence of the TGA pop, fewer bills need to be issued, so Bills could start to trade a bit richer. Since 4wk→6mth Bills are only ~1-7bps above the 5.30% Fed RRP rate, if Bill yields drop below RRP, MMFs will switch from Bills back to RRP for a yield pickup, or so the logic goes. The combination of tax payments leaving bank accounts/pop in TGA, plus a stable RRP, means bank reserves decline and thus system liquidity declines. The RRP stabilizing here around ~$500bln suggests to some that perhaps we are close to the elusive RRP floor that so many have speculated is “somewhere a few hundred billion above zero.”
Normally I would say Yellen is in a bit of a corner in keeping the asset price machine cranking (as my pal
calls “Wealthflation”). But there is a wrinkle here, a possible way through this…a sort of echo of last year’s debt ceiling.