Revisiting Liquidity Drains

In March of last year I discussed the interplay of the Fed’s reverse repo facility (RRP where money market funds park liquidity, basically a way the Fed sequestered prior QE outside the banking system) with the Treasury General Account (TGA) and bank reserves in a note I called Liquidity Drains. Worth a quick skim of the appendix there for those unfamiliar with certain terms like RRP, TGA, etc. The idea was that risk would move higher (we corrected for two weeks in April going into tax day and then ripped), and since Yellen still had options to drain the RRP, risk shook off a 2-week April selloff and then pressed on into 2Q-end.

Today the Fed’s past sequestered QE is no longer available, as Janet Yellen timed the withdrawal pretty much perfectly — we are down to the last $120bln as of this moment:

Source: Bloomberg

Meanwhile bank reserves continue to chop around the $3.2T level:

Source: Bloomberg

Remember, if the RRP or the TGA decline, these are liquidity positive (past QE being deployed in the former case, and spending without Treasury issuance to offset banking liquidity in the latter). Bank reserve declines are liquidity contracting (QT). I’m now thinking through where things go from here liquidity-wise, and implications for US equities and overall US risks: