The liquidity pressure in the US monetary system reappears: tightening in the repurchase market and scarcity of reserves.

Introduction: The Reappearance of Liquidity Tightening

In November 2025, signs of liquidity pressure once again emerged in the U.S. financial system, particularly the volatility of the repo market has become the focus of attention. The repo market, as the core “pipeline” of the U.S. monetary system, has a daily trading volume exceeding $3 trillion, making it a key channel for financing by banks, money market funds, and hedge funds. Recently, the spread between the Secured Overnight Financing Rate (SOFR) and the Interest on Reserve Balances (IORB) widened to over 14 basis points, reaching a high not seen since the liquidity crisis during the pandemic in 2020. This phenomenon is not an isolated event, but closely related to the Federal Reserve's quantitative tightening (QT) process, fluctuations in the Treasury General Account (TGA) balance, and the accumulation of high-leverage basis trades.

According to data from the New York Federal Reserve, as of November 12, 2025, the average SOFR is 3.98644%, approximately 8.6 basis points higher than the IORB (3.90%). This widening spread indicates that the cost for banks to obtain overnight funds is increasing, and liquidity is shifting from “ample” to “adequate” or even to the critical point of “scarce.” The continuous statements from Federal Reserve officials further reinforce this concern: from Chairman Jerome Powell's unusual comments to warnings from former and current System Open Market Account (SOMA) managers, monetary authorities are closely monitoring potential risks. If the pressure persists, it may 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 financial system in the United States and globally.

Causes of Buyback Market Pressure: Dual Squeeze from QT, TGA and Fiscal Financing

The core function of the repurchase market is to provide short-term secured financing, primarily collateralized by U.S. Treasury securities. In 2025, the pressure on this market comes from multiple overlapping factors. First, the Federal Reserve's QT, initiated in June 2022, has cumulatively reduced the size of its balance sheet by approximately $2.19 trillion. As of November 2025, the Federal Reserve's total assets have decreased to about $6.8 trillion, while bank reserves have fallen from a peak of $3.5 trillion to $2.85 trillion. This reduction has directly decreased the supply of liquidity within the system, leading to a surge in borrowing demand from banks in the repurchase market.

Secondly, the abnormal fluctuations in the balance of the Treasury General Account (TGA) have intensified the extraction of Liquidity. The TGA is the Treasury's “checking account” at the Federal Reserve, used to manage tax revenues and government expenditures. In 2025, due to the government shutdown causing delays in spending, the TGA balance soared from about $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. For every $100 billion increase in the TGA balance, it is equivalent to withdrawing an equal amount of reserves from the banking system, further driving up repo rates. The New York Fed report shows that the TGA rebuilding process has caused the reserve/GDP ratio to drop from a pandemic peak of 15% to about 8%, nearing the historical warning line.

In addition, the expansion of fiscal deficits and the surge in government bond issuance are another key driver. In the fiscal year 2025, the U.S. federal deficit is expected to reach $1.8 trillion, accounting for 6% of GDP. To finance this gap, the Treasury is issuing a record amount of short-term Treasury bills (T-bills), with issuance in November expected to exceed $1 trillion. These short-term debts need to be financed through the repurchase market, but a decrease in bank reserves has made it difficult for primary dealers to absorb the entire supply, thereby pushing up SOFR.

Latest data shows that on November 5, 2025, the SOFR-IORB spread reached 22 basis points, doubling from the previous month. The three-party repo rate (TGCR) also shifted from an average of 8-9 basis points below IORB in September to slightly above IORB in October. These indicators reflect that the transition of liquidity from “abundant reserves” to “ample reserves” has caused friction.

Timeline: From Powell's Comments to SOMA Manager Alert

The evolution of the buyback market pressure can be traced back to October 2025, forming a clear timeline that highlights the formation of internal consensus within the Federal Reserve.

• October 14, 2025

Federal Reserve Chairman Jerome Powell spoke at a National Association for Business Economics (NABE) meeting, unusually mentioning the repurchase market and SOFR spreads. He noted, “Liquidity conditions are gradually tightening, including a general rise in repo rates and noticeable but temporary pressures on specific dates.” Powell emphasized that the Fed is monitoring several indicators to determine the timing of the end of QT. This comment differs from the usual conventional statements on macroeconomic policy, suggesting that there are hidden risks in the monetary plumbing. The market interprets this as QT possibly ending ahead of January 2026.

• October 15, 2025

The Federal Reserve released the report “Cross-Border Tracking of Treasury Basis Trades” (FEDS Notes), revealing that hedge funds have net purchased $1.2 trillion in Treasuries through basis trades since 2022, accounting for 40% of the Treasuries issued during the same period. The report notes that this trading was partially unwound in March 2020 due to “significant stress” in the repo market, but the scale has exceeded the peak levels of 2019-2020 in recent years, with leverage ratios reaching as high as 50:1 to 100:1, resulting in a total exposure of approximately $1.8 trillion. The amount of Treasuries held by hedge funds in the Cayman Islands may be $1.4 trillion higher than official data. This explains the context of Powell's comments the day before: basis trades rely on repo financing, and if SOFR rises, it could trigger forced liquidations and Treasury sell-offs.

• October 31, 2025

Lorie Logan, the president of the Dallas Federal Reserve and former SOMA manager, stated at a banking conference that “if the repurchase rate does not soften, asset purchases must return.” Logan emphasized that the recent SOFR being higher than the IORB is not a “one-time anomaly,” but a signal of changes in reserve conditions. She supports ending QT to avoid market volatility. As a former head of SOMA, Logan's views carry authority, and she also suggested shifting the FOMC operational target from the federal funds rate to TGCR to better reflect dynamics in the repurchase market.

• November 12, 2025

Roberto Perli, Executive Vice President of the New York Fed and current SOMA manager, stated bluntly at the 2025 U.S. Treasury Market Conference that “reserves are no longer abundant.” He pointed out that the rise in SOFR, increased use of the SRF, and changes in the elasticity of the reserves demand curve all indicate that reserves are nearing “adequate” levels. Perli expects that the Fed “won't have to wait too long” to initiate asset purchases in order to maintain liquidity. This aligns with Logan's views and underscores the urgency of a policy shift.

This timeline is no coincidence, but rather the Federal Reserve's real-time response to liquidity indicators. On platform X (formerly Twitter), analyst @BullTheoryio posted on November 1, stating, “Liquidity pressure is reappearing, similar to Q3/Q4 2019, which may force the Federal Reserve to restart QE.” Similar discussions have repeatedly appeared in posts from @GlobalMktObserv and @TheBubbleBubble, reflecting the market's consensus on systemic risks.

Basic Trading Amplification Risk: The Hidden Dangers of $1.8 Trillion Leverage Exposure

The basis trade is an amplifier of repo market pressure. This trade involves hedge funds going long on spot government bonds while shorting government bond futures, profiting from the small price difference between the two. Leverage financing is mainly achieved through the repo market, with government bonds themselves serving as collateral. The Federal Reserve's report shows that between 2022 and 2024, hedge funds in the Cayman Islands purchased $1.2 trillion in government bonds through this trade, with extremely high leverage.

The historical lesson is profound: In March 2020, basic trading was partially closed due to repurchase pressure, leading to a severe shock in the government bond market, prompting the Federal Reserve to urgently inject Liquidity. The current scale is even larger—total exposure of $1.8 trillion, accounting for nearly half of government bond purchases. If the SOFR spread continues to widen, rising financing costs may trigger a chain of liquidations: funds sell $1.8 trillion in spot government bonds while covering futures positions, further pushing up yields.

User @infraa_ posted a summary on November 13: “The base trading volume has surpassed the peak of 2019-2020, and repurchase pressure may trigger a $1.8 trillion government bond sell-off.” Institutions like Citigroup and Barclays warn that this trading is not a “one-time anomaly” but rather a structural risk.

Federal Reserve Tool Response: SRF Usage and Reserve Indicators

In response to pressure, the Federal Reserve's Standing Repo 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 set at the upper limit of the federal funds rate (4.00%). On October 31, 2025, banks borrowed a record $50.35 billion from the SRF, dropping to $22 billion on November 3 and further down to $4.8 billion on November 4. A total injection of about $125 billion occurred over five days. John Williams, President of the New York Fed, stated that the SRF “has fulfilled its role,” but the increased usage reflects a scarcity of reserves.

The reserve indicators further confirm the tightening: the ratio of bank reserves to the money supply (M2) has dropped to 13%, close to the levels before the 2023 regional bank crisis, which triggered the collapse of three major banks including Silicon Valley Bank. The reverse repurchase (ON RRP) balance is close to zero, briefly rebounding to $52 billion only at the end of the quarter. The spread between the effective federal funds rate (EFFR) and the interest on reserves balances (IORB) is -7 basis points, but the SOFR-EFFR spread has widened, indicating that the unsecured market has also been affected.

Market Commentary: From Worries to Policy Expectations

The statements from Federal Reserve officials have sparked widespread discussion. Logan and Powell emphasized that reserves are “no longer ample” and may require asset purchases. JPMorgan CEO Jamie Dimon warned of “cracks in the bond market.” On platform X, @ZegoodBanker pointed out, “QT + record T-bill issuance = Liquidity pressure, the Fed may need to act.” @DarioCpx quoted Logan's remarks, predicting that “closing for more than 35 days will amplify repurchase tightening.”

There is a clear divergence among Wall Street institutions. Citigroup believes the pressure is “not temporary,” while Barclays states that “we are not out of the woods yet.” Goldman Sachs strategists predict that the Fed may shift to “invisible QE” by 2026. However, optimists like @BullTheoryio believe that this pressure is similar to that in 2019, which will drive liquidity injections and asset rebounds.

Risks and Prospects: Systemic Shocks and Policy Shifts

If the buyback pressure continues, it may trigger a domino effect: the closure of basic trades pushes up government bond yields, amplifying fiscal financing costs; the scarcity of reserves suppresses credit transmission, exacerbating consumer and corporate defaults (the credit card default rate has reached 11.4%, and the car buyback rate is approaching GFC levels). The global interconnected risk is prominent: Japan's 10-year yield is nearing a 17-year high, and the Eurozone sovereign debt index faces an “explosive” warning from the IMF.

Looking ahead to 2026, after the Fed ends QT on December 1, it may gradually resume asset purchases, aiming to maintain the reserve/GDP ratio above 8%. However, the challenge lies in balancing inflation (CPI still exceeds 2%) with Liquidity. The market leverage is high—margin debt has reached $1.1 trillion, a record high—increasing vulnerability.

In summary, the pressure in the repurchase market serves as a warning bell for the monetary system, stemming from structural imbalances. The Federal Reserve's timely response can help alleviate the shock, but neglecting it could escalate into a full-blown crisis. Investors need to be wary of liquidity asymmetry: the financial core remains stable, while the peripheral economy is under pressure.