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For the first time since the Great Recession, banks didn't park a single dollar in the Federal Reserve's Reverse Repo Facility overnight. That's right—zero bids.
The mother ship of the U.S. banking system, which has been the go-to safety net for surplus cash, found no takers.
Source: NewYorkFed website
This isn't just an obscure balance sheet event. It's a flashing red warning light that bank liquidity is vanishing — fast.
After COVID stimulus flooded banks with cash, the Reverse Repo Facility ballooned to over $2 trillion in 2022-23. But as inflation eroded savings and delinquency rates climbed, that cash pile has been slowly draining. Now, we may have hit a breaking point.
Banks no longer have excess cash to lend to the Fed. More concerning?
Interbank lending has already dried up. This suggests financial institutions could soon be forced into net borrowing mode — a signal of growing stress in the system.
The bond market is reacting. Yields on Treasuries longer than two years are dropping fast, signaling investors believe rates have peaked.
Five-Year Treasury Yield:
10-Year Treasury Yield:
They're locking in returns now before the next recession resets the game.
This capital shift is also dragging down stocks. Liquidity is the lifeblood of markets, and if banks are running on fumes, risk assets will feel the squeeze.
For those watching from the sidelines, here are key ETFs to monitor:
This liquidity drain wasn't a surprise to those paying attention – but what happens next will be.
Keep a close eye on the Fed's next moves, because the money spigot may be running dry.
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Image: Shutterstock
