Liquidity pressures reappear in the US monetary system: Tight repo market and scarce reserves

Introduction: The Reappearance of Liquidity Tightening

In November 2025, the US financial system once again showed signs of liquidity pressure, particularly with volatility in the repo market becoming a focus of attention. As the core "pipeline" of the US monetary system, the repo market has a daily trading volume exceeding $3 trillion and is a key channel for financing for banks, money market funds, and hedge funds. Recently, the spread between the Secured Overnight Financing Rate (SOFR) and the Federal Reserve Reserve Balance Rate (IORB) has widened to over 14 basis points, reaching its highest point since the liquidity crisis of the 2020 pandemic. This phenomenon is not an isolated event but is closely related to the Federal Reserve's quantitative tightening (QT) process, fluctuations in the Treasury General Account (TGA) balance, and the accumulation of highly leveraged basis trades.

According to data from the Federal Reserve Bank of New York, as of November 12, 2025, the average SOFR was 3.98644%, approximately 8.6 basis points higher than the IORB (3.90%). This widening spread indicates that banks are facing increased costs in obtaining overnight funding, and liquidity is at a critical point, shifting from "ample" to "sufficient" or even "scarce." A series of statements from Federal Reserve officials have further reinforced these concerns: from unusual comments by Chairman Jerome Powell to warnings from former and current System Open Market Account (SOMA) managers, monetary authorities are closely monitoring potential risks. If the pressure persists, it could force the Federal Reserve to restart asset purchases to maintain financial stability. This article will analyze the causes of pressure in the repurchase market, key timelines, the impact of related transactions, and comments from market participants based on the latest data and official reports. Through objective analysis, it reveals the potential impact of this phenomenon on the US and even global financial systems. Causes of Pressure in the Repurchase Market: The Dual Squeeze of QT, TGA, and Fiscal Financing The core function of the repurchase market is to provide short-term secured financing, primarily using US Treasury bonds as collateral. In 2025, the pressure in this market stemmed from a combination of factors. First, the Federal Reserve's QT program, launched in June 2022, has cumulatively reduced its balance sheet by approximately $2.19 trillion. By November 2025, the Federal Reserve's total assets will have fallen to approximately $6.8 trillion, and bank reserves will have decreased from a peak of $3.5 trillion to $2.85 trillion. This reduction directly decreases the supply of liquidity within the system, leading to a surge in banks' lending demand in the repurchase market. Secondly, the abnormal fluctuations in the Treasury's General Account (TGA) balance exacerbated the liquidity withdrawal. The TGA is the Treasury's "demand account" at the Federal Reserve, used to manage tax revenue and government spending. In 2025, due to the government shutdown causing spending delays, the TGA balance surged from approximately $890.8 billion at the end of September to $924.9 billion on November 3, an increase of approximately $137.1 billion from the previous week. Every $100 billion increase in the TGA balance is equivalent to withdrawing an equivalent amount of reserves from the banking system, further pushing up repurchase rates. A report from the New York Federal Reserve shows that the TGA rebuilding process has caused the reserve/GDP ratio to fall from 15% at the peak of the pandemic to about 8%, close to the historical warning line. Furthermore, the expansion of the fiscal deficit and the surge in Treasury issuance are another key driver. In fiscal year 2025, the US federal deficit will reach $1.8 trillion, accounting for 6% of GDP. To finance this gap, the Treasury has issued a record number of short-term Treasury bills (T-bills), with November issuance expected to exceed $1 trillion. These short-term debts need to be financed through the repurchase market, but reduced bank reserves have made it difficult for primary dealers to absorb all the supply, thus pushing up the SOFR (Security Default Rate). Latest data shows that on November 5, 2025, the SOFR-IORB spread reached 22 basis points, doubling from the previous month. The Tripartite Repo Rate (TGCR) also shifted from being 8-9 basis points lower than the IORB on average in September to being slightly higher than the IORB in October. These indicators reflect that the transition of liquidity from "abundant reserves" to "ample reserves" has triggered friction. Timeline: From Powell's Comments to SOMA Managers' Alarms The evolution of pressures in the repo market can be traced back to October 2025, forming a clear timeline that highlights the formation of consensus within the Federal Reserve. On October 14, 2025, Federal Reserve Chairman Jerome Powell, speaking at the National Association for Business Economics (NABE) conference, unusually mentioned the repo market and the SOFR spread. He pointed out that "liquidity conditions are gradually tightening, including an overall rise in repurchase rates and significant but temporary pressures on specific dates." Powell emphasized that the Fed is monitoring multiple indicators to determine when QT will end. This commentary differs from previous routine statements on macroeconomic policy, suggesting that the monetary plumbing is showing signs of trouble. The market interprets this as QT potentially ending as early as January 2026. On October 15, 2025, the Federal Reserve released its "Cross-Border Tracking of Underlying Treasury Transactions" (FEDS Notes) report, revealing that hedge funds have net purchased $1.2 trillion in Treasury securities through underlying transactions since 2022, accounting for 40% of Treasury securities issued during the same period. The report points out that the trade was partially liquidated in March 2020 due to "significant pressure" in the repo market, but its size in recent years has exceeded the peak of 2019-2020, with leverage ratios as high as 50:1 to 100:1 and total exposure of approximately $1.8 trillion. Cayman Islands hedge funds may hold $1.4 trillion more in Treasury bonds than official figures suggest. This explains the context of Powell's comments the day before: the underlying trade relies on repo financing, and if SOFR rises, it could trigger forced liquidation and a sell-off of Treasury bonds. On October 31, 2025, Dallas Fed President Lorie Logan (former SOMA manager) stated at a banking conference, "If repo rates don't soften, asset purchases must return." Logan emphasized that the recent SOFR being higher than IORB is not a "one-off anomaly," but rather a signal of changing reserve conditions. She supports ending QT to avoid market volatility. As a former head of SOMA, Logan's views are authoritative, and she also suggested shifting the FOMC's operational target from the federal funds rate to the TGCR to better reflect repo market dynamics. On November 12, 2025, Roberto Perli, Executive Vice President of the Federal Reserve Bank of New York (currently SOMA manager), stated bluntly at the 2025 U.S. Treasury Markets Conference that "reserves are no longer abundant." He pointed out that the rising SOFR, increased SRF usage, and changes in the elasticity of the reserve demand curve all indicate that reserves are approaching "ample" levels. Perli expects the Fed to initiate asset purchases "not long after" to maintain liquidity. This aligns with Logan's viewpoint, reinforcing the urgency of a policy shift. This timeline is not a coincidence, but rather a reflection of the Fed's real-time response to liquidity indicators. On the X platform (formerly Twitter), analyst @BullTheoryio posted on November 1st, "Liquidity pressures have reappeared, similar to Q3/Q4 of 2019, potentially forcing the Fed to restart QE." Similar discussions have repeatedly appeared in posts on @GlobalMktObserv and @TheBubbleBubble, reflecting a market consensus on systemic risk. The underlying transaction amplifies risks: the hidden dangers of a $1.8 trillion leveraged exposure. The underlying transaction amplifies pressure in the repo market. This transaction involves hedge funds simultaneously going long on spot Treasury bonds and shorting Treasury futures, profiting from the small price difference between the two. Leveraged financing is primarily achieved through the repo market, with the Treasury bonds themselves as collateral. A Federal Reserve report shows that between 2022 and 2024, Cayman Islands hedge funds purchased $1.2 trillion in Treasury bonds through this transaction, representing extremely high leverage. The historical lessons are profound: In March 2020, the underlying transaction was partially liquidated due to repurchase pressure, causing a sharp shock in the Treasury market, prompting the Federal Reserve to inject liquidity urgently. The current scale is even larger—a total exposure of $1.8 trillion, accounting for nearly half of Treasury bond purchases. If the SOFR spread continues to widen, rising financing costs could trigger a chain reaction of liquidations: funds would sell $1.8 trillion in spot Treasury bonds while simultaneously covering futures positions, further pushing up yields. User @infraa_ posted a summary on November 13th: "The scale of the underlying transaction has exceeded the peak of 2019-2020, and repurchase pressure may trigger a $1.8 trillion sell-off of Treasury bonds." Institutions such as Citigroup and Barclays have warned that this transaction is not a "one-off anomaly," but rather a structural risk.

Federal Reserve Tools Response: SRF Use and Reserve Indicators

To address pressure, the Federal Reserve's Standing Repurchase Facility (SRF) has become a key buffer. The SRF allows primary dealers to borrow overnight funds from the Fed using Treasury securities as collateral, with a minimum bid rate equal to the upper limit of the federal funds rate (4.00%). On October 31, 2025, banks borrowed a record $50.35 billion from the SRF, $22 billion on November 3, and then fell to $4.8 billion on November 4. The total injection over five days was approximately $125 billion. New York Fed President John Williams stated that the SRF "fulfilled its mandate," but the increased use reflects a shortage of reserves. Reserve indicators further confirm tightening: the ratio of bank reserves to money supply (M2) fell to 13%, close to pre-2023 regional banking crisis levels, which triggered the collapse of three large banks, including Silicon Valley Bank. The balance of reverse repurchase agreements (ON RRPs) was near zero, only briefly rising to $52 billion at the end of the quarter. The spread between the federal funds rate (EFFR) and the international interest rate repo rate (IORB) was -7 basis points, but the SOFR-EFFR spread widened, indicating that the unsecured market was also affected. Market Commentary: From Concerns to Policy Expectations Statements by Federal Reserve officials have sparked widespread discussion. Logan and Paley emphasized that reserves are "no longer sufficient" and asset purchases may be necessary. JPMorgan CEO Jamie Dimon warned of "cracks appearing in the bond market." On the X platform, @ZegoodBanker pointed out that "QT + record T-bill issuance = liquidity pressure, the Fed may need to act." @DarioCpx quoted Logan's remarks, predicting that "closing the repo market for more than 35 days will amplify the tightening of repo transactions." Wall Street institutions are clearly divided. Citigroup believes the pressure is "not temporary," while Barclays says it is "not yet out of the woods." Goldman Sachs strategists predict that the Fed may shift to "hidden QE" in 2026. However, optimists like @BullTheoryio believe that this pressure is similar to that of 2019, which will drive liquidity injections and asset rebounds. Risks and Outlook: Systemic Shocks and Policy Shifts If repurchase pressure persists, it could trigger a domino effect: the liquidation of underlying transactions could push up government bond yields, amplifying fiscal financing costs; scarce reserves could inhibit credit transmission, exacerbating consumer and corporate defaults (credit card default rates have reached 11.4%, and auto buyback rates are approaching GFC levels). Global interconnected risks are prominent: Japan's 10-year yield is nearing a 17-year high, and the Dow Jones Industrial Average faces an "explosive" warning from the IMF regarding Eurozone sovereign debt. Looking ahead to 2026, after the Fed ends QT on December 1st, it may gradually increase asset purchases, aiming to maintain a reserve/GDP ratio above 8%. However, the challenge lies in balancing inflation (CPI will still exceed 2%) and liquidity. High market leverage—margin debt reaching a record high of $1.1 trillion—increases vulnerability. In short, the pressure in the repo market is a warning sign for the monetary system, stemming from structural imbalances. A timely response from the Fed can mitigate the shock, but ignoring it could amplify it into a full-blown crisis. Investors need to be wary of liquidity asymmetry: a stable financial core while the external economy is under pressure.