๐ Fed liquidity bounces back strongly
Following the recent end-of-year Fed liquidity squeeze, liquidity has now bounced back.
Net Federal Reserve Liquidity has risen sharply by around $395bn since January 1 (๐ก).
This is the largest ten-day increase since March 2023 (๐ข).
Asset markets have been pressured by a rising dollar and Treasury yields over recent days/weeks.
Fed liquidity has a loose inverse correlation to the dollar and Treasury yields, so rising Fed Liquidity is, on the margin, a headwind for DXY and yields.
A large part of the recent bounce has come from decreased Reverse Repo usage (liquidity injection).
The end-of-year balance sheet "window dressing" rush into the Reverse Repo is now being reversed.
The Treasury General Account (TGA) balance has also decreased in recent days (liquidity injection).
So what's next?
The key component to watch over the coming weeks/months is the TGA.
It will soon be time to start looking at a potentially significant TGA drawdown (big liquidity injection) as the Treasury is forced into "extraordinary measures" due to the reinstatement of the US Government debt ceiling.
Treasury Secretary Janet Yellen recently announced that the "extraordinary measures" playbook will be needed at some point between January 14 and January 23.
I am planning to write a detailed post about my thoughts on the debt ceiling TGA drawdown next week.
However, one thing to also note is that the TGA balance will likely still increase quite notably (liquidity drain) in the short-term (next couple of weeks).
The TGA balance rises seasonally around mid to late January - this is largely due to quarterly estimated tax payments (January 15).
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