Introduction: Sudden Tightening Signals in the Money Market
On October 31, 2025, on the eve of Halloween, the US money market experienced significant turmoil. The Federal Reserve's Standing Repo Facility (SRF) usage hit a record high of $50.35 billion, far exceeding the levels of previous weeks. This event was not due to seasonal fluctuations, but rather a sign of a sharp escalation in money market liquidity pressures. As the core channel for wholesale funding, the surge in interest rate volatility and facility usage in the repo market has raised concerns about the stability of the overall financial system.
Since mid-September, the money market has shown signs of tightening.
On September 15, the Tricolor Group incident exposed potential risks in the private lending sector, and the subsequent end-of-quarter liquidity window exacerbated the pressure. Entering October, repurchase demand continued to climb after mid-October. Although the market briefly calmed down after the Federal Reserve meeting on October 29, it erupted again on October 31. In the morning repurchase operations, $4.4 billion was borrowed against U.S. Treasury collateral, and nearly $16 billion was borrowed against mortgage-backed securities (MBS). In the afternoon, the demand surged further, with $25 billion in Treasury collateral and an additional $5 billion in MBS, bringing the total to over $50 billion. This scale exceeded the Federal Reserve's previous expectations of "technical volatility," similar to the repurchase crisis in September 2019, when a liquidity shortage forced the Federal Reserve to intervene urgently. Currently, the Federal Reserve's target range for the federal funds rate is 3.75%-4.00%, following a 25 basis point reduction on October 29. However, the Secured Overnight Financing Rate (SOFR) recorded 4.04% on October 30th, with a 30-day average of 4.20185%, slightly above the midpoint of the range, indicating a spillover of pressure from the repo market to other short-term funding channels. This phenomenon is not isolated but rather a result of accumulated risk aversion during the quantitative tightening (QT) process. The Federal Reserve has announced that it will terminate QT on December 1st, ending balance sheet reduction ahead of schedule. However, the market questions whether this adjustment is sufficient to resolve potential crises. This article will review events from 2019, analyze current data, explore shadow banking and private lending risks, and assess the potential impact on the macroeconomy. Through these aspects, it reveals the systemic challenges behind the tightening of the money market. Historical Review: Lessons from the 2019 Repo Market Crisis On September 17, 2019, a liquidity crisis suddenly struck the US repo market, with the overnight repo rate soaring to 10%, far exceeding the federal funds rate ceiling of 5.25%. At that time, the Federal Reserve's balance sheet had shrunk from a peak of $4.5 trillion to approximately $3.8 trillion, and the QT process had led to a decline in bank reserves to $1.4 trillion. The shift in liquidity from an "ample" to an "adequate" framework triggered market friction. The root of the crisis lay in a confluence of factors: end-of-quarter regulatory requirements prompted banks to "window-dress," reducing leverage exposure; peak corporate cash demand during tax season; and risk aversion stemming from global trade frictions, leading to the repatriation of overseas dollar funds. The shadow banking system amplified the pressure, with non-bank financial institutions (such as money market funds) holding large amounts of Treasury bonds but unable to effectively finance themselves due to disruptions in the collateral reuse chain. The Federal Reserve responded swiftly: launching temporary repurchase operations on September 17, injecting hundreds of billions of dollars of liquidity into the market; and expanding asset purchases starting in October, restarting balance sheet expansion. The crisis continued until the end of the year, with total intervention exceeding $500 billion. Subsequently, the Federal Reserve introduced the Standing Repurchase Facility (SRF) and the Reverse Repurchase Facility (RRP) to provide a permanent liquidity buffer. Furthermore, the reserve framework was adjusted from "ample reserves" to "adequate reserves," with a target reserve level set at $1.4 trillion to $1.6 trillion. This event exposed the fragility of the modern financial system: the repurchase market, exceeding $4 trillion and accounting for over 70% of short-term financing, is highly dependent on a few large banks (such as JPMorgan Chase and Goldman Sachs). While the 2019 crisis did not trigger a recession, it accelerated the Federal Reserve's shift to easing policies and paved the way for the 2020 pandemic stimulus. The current scenario for 2025 is highly similar: QT leads to a decline in reserves, the emergence of shadow banking risks, and global economic uncertainty. Current Money Market Data: Signs of Tightening Escalate Sharply In October 2025, repurchase facility usage saw exponential growth. In mid-September, average daily borrowing was less than $1 billion, primarily due to seasonal bottlenecks. In early October, the quarter-end effect pushed it to $2 billion, but it stabilized in the $700-1 billion range after mid-October. On October 29, usage rose to approximately $10 billion after the Federal Reserve meeting. However, an explosive surge occurred on October 31: $4.4 billion in Treasury repurchase agreements and $15.9 billion in MBS in the morning; and $25 billion in Treasury bonds and $5 billion in MBS in the afternoon, totaling $50.35 billion, a record since the introduction of the SRF in 2021. This surge was not due to the month-end effect. In the money market, the end of the month is not a critical point, unlike the end of the quarter, which involves regulatory reports. Data shows that the outstanding balance of reverse repurchase agreements (RRPs) reached $51.8 billion on October 31, an increase from the previous day, indicating that money market funds (MMFs) are saturated with liquidity. Meanwhile, the Tripartite Repo General Collateral Rate (TGCR) was on average 8-9 basis points lower than the IORB (Interbank Reserve Rate) in the first eight months of October, but turned slightly higher in September and October, indicating rising funding costs. The SOFR, as the benchmark for the repo market, showed a clear trend in October: 4.31% on October 2, subsequently falling to 4.04% on October 30. The 30-day average SOFR rose from 4.19115% at the beginning of October to 4.20185% at the end of the month, higher than the median effective federal funds rate (EFFR) (approximately 3.875%). The EFFR calculation will not be released until Monday, but preliminary estimates suggest it will be above the upper limit of 4.00% on October 31, continuing the volatile pattern since September. The SOFR exceeded the upper limit by 4 basis points in September, and although it fell back in October, the weekend effect may amplify the pressure. Bank reserves are another focus: averaging $3.2 trillion in the first half of 2025, it fell to $2.8 trillion in October, more than double the peak in 2019. Since the QT program started in 2022, it has reduced assets by $1.5 trillion, but the reserve/GDP ratio remains at 10-11%, far above the "adequate" threshold. These data suggest that the tightening is not due to an absolute shortage of reserves, but rather to uneven distribution and rising risk premiums. The Fed's response to the current tightening is similar to that of 2019. In its October 29 FOMC statement, the committee decided to end QT on December 1, with no further reduction in total securities holdings. Chairman Powell acknowledged at the press conference that recent market pressures accelerated this timeline, similar to the shift from "unplanned end" to "emergency intervention" in 2019. The Fed lowered the QT cap from $60 billion per month to $30 billion (mid-2024), but the October volatility prompted further tightening. Under the current policy framework, the Federal Reserve does not directly target repurchase rates, but rather anchors them to the EFFR. However, the SOFR, which covers 98% of domestic repurchase transactions, is more representative, and its volatility has spilled over into the federal funds market. Powell emphasized that this is a normal fluctuation during the transition from "ample reserves" to "adequate reserves," accompanied by seasonal and regulatory factors. However, market data shows that the TGCR was higher than the IORB in October, indicating that funding pressures were greater than expected. The SRF was designed to smooth out volatility, providing unlimited borrowing (US$500 billion daily), but the surge in usage on October 31 shows its limited buffering effect. The Federal Reserve may discuss additional measures at its November meeting, such as restarting asset purchases or adjusting reserve targets. Analysts predict that the end of QT will release approximately $200 billion in liquidity, but if shadow banking risks persist, more aggressive intervention may be necessary. Potential Reasons: Risk Aversion and Shadow Banking Risks The core of the money market tightening is not a policy mistake by the Federal Reserve, but rather the amplified risk aversion of market participants. The August non-farm payroll report showed a slowdown in the labor market, with the unemployment rate rising to 4.2% and increased layoffs in small and medium-sized enterprises. This confirms the downturn in the real economy, affecting the quality of private credit portfolios. The private credit market is worth $2 trillion and is projected to grow by 20% by 2025, but valuation bubbles and fraud risks are becoming increasingly prominent. Shadow banking (non-bank financial intermediaries) is an amplifier of tightening. JPMorgan CEO Jamie Dimon recently warned of "cockroaches," referring to hidden risks. A prime example is the Tricolor collapse: the private lending provider defaulted in September, exposing excessive exposure to high-risk auto loans. First Brands followed suit, with its credit rating downgraded in October, triggering a $200 million loss. These events lead to doubts about collateral valuation, causing money market participants (such as the MMF) to reduce repurchase operations, even with government bond guarantees. Information asymmetry exacerbates the problem. Bank of England Governor Andrew Bailey stated in mid-October that inquiries with private lending sponsors yielded "nothing to worry about," but regulators struggle to verify this. International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned that private lending risks "keep her up at night" as banks' lending to her has risen to 20%. The shadow banking system, totaling $3 trillion, exhibits "bubble characteristics," lacks transparency, and could trigger a global shock. The appreciation of the US dollar further widens the interest rate differential between the US and China, and the repatriation of overseas funds reduces global liquidity supply. The US dollar index rose 3% in October, corresponding to fluctuations in the SOFR (Social Exchange Rate of Return). These factors intertwine to create a "cockroach effect": risks emerge from the shadows, forcing cash holders to turn to Federal Reserve facilities. Similarities with 2019: Pattern Repetition and Differences
The 2025 scenario highly overlaps with 2019. First, the QT background is similar: both occur during periods of declining reserves, with reserves at 1.4 trillion in 2019 vs. 2.8 trillion in 2025, but the relative tightening effect is comparable. Second, the triggering events are similar: in 2019, it was the trade war and yield curve inversion; in 2025, it is a slowdown in employment and private credit defaults. The yield curve inverted in October, indicating a risk of recession.
The 2025 scenario highly overlaps with 2019. First, the QT background is similar: both occur during periods of declining reserves, with reserves at 1.4 trillion in 2019 vs. 2.8 trillion in 2025, but the relative tightening effect is comparable. Second, the triggering events are similar: in 2019, it was the trade war and yield curve inversion; in 2025, it is the slowdown in employment and private credit defaults. The yield curve inverted in October, indicating a risk of recession.
Weatherly
Catherine
Anais
Joy