AS April’s tax deadline nears, so does the risk of disruptions in US funding markets, according to Wall Street analysts.
“The most important thing to watch out for is how close we’re actually getting to the lowest comfortable level of reserves,” said Teresa Ho, head of short-term interest-rates strategy at JPMorgan Chase & Co. “This time we’re seeing liquidity being withdrawn from the system. It’s a slightly different dynamic than month- and quarter-end, but still has the potential to be disruptive.”
SOFR hit peaks at the end of November and December amid a confluence of events including banks paring back lending for regulatory purposes. Back in 2022, the effect on funding markets was negligible because the Fed had yet to start unwinding its balance sheet, a process known as quantitative tightening. Even after the tax-related decline in reserves, institutions still had about $3.32 trillion parked at the central bank and roughly $1.8 trillion stashed at the overnight reverse repo facility, or RRP, a barometer of excess liquidity in the financial system.
Chair Jerome Powell said last month policymakers were planning on tapering QT fairly soon. Meanwhile, minutes of the March 19-20 gathering released Wednesday showed policymakers favored QT easing “sooner than later” to avoid market stress, and with declines in RRP use seen slowing, any future balance-sheet runoff will likely see a shift to more losses in bank reserves, “potentially at a rapid pace.
Fast forward, and fears of such ructions this time around appear unfounded, according to some market watchers.
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