Core Viewpoint - Citigroup indicates that as the U.S. Treasury rebuilds its cash account, the reverse repo balance is being consumed, leading to a decline in bank reserves and increased pressure in the repo market, which may prompt Federal Reserve officials to discuss the balance sheet issue in their upcoming meeting [1][3][9] Group 1: Federal Reserve's Balance Sheet Reduction - The Federal Reserve's balance sheet reduction is nearing its final phase, with signs of liquidity tightening in the market [3][9] - According to Citigroup, the Fed's holdings of Treasury securities have decreased from approximately $5.8 trillion to $4.2 trillion, and mortgage-backed securities (MBS) have dropped from about $2.7 trillion to $2.1 trillion [4] - The Fed's balance sheet liabilities have shifted liquidity from reverse repos and bank reserves to the U.S. Treasury cash account, which has increased to about $680 billion and is expected to rise to around $850 billion [4][6] Group 2: Repo Market Pressure - As the reverse repo balance approaches zero, additional liquidity flowing into the Treasury cash account will primarily come from bank reserves, which are expected to decline to approximately $2.8 to $2.9 trillion by year-end [6] - The Secured Overnight Financing Rate (SOFR) has been above the Interest on Reserve Balances (IORB) for most of September, exceeding IORB by 11 basis points recently, indicating rising repo market pressure [6][8] - Despite the increased pressure in the repo market, the effective federal funds rate remains relatively stable, with a slight risk of rising in relation to reverse repo rates in the coming months [8] Group 3: Implications for Investors - Citigroup expects that if repo market pressures persist, the Federal Reserve may end its balance sheet reduction by the end of the year, although a specific timeline may not be immediately announced [9] - The change in the Fed's balance sheet reduction pace could impact short-term interest rate markets and the yield curve, potentially stabilizing market liquidity and supporting risk assets while exerting downward pressure on short-term rates [9]

Core Viewpoint - The Federal Reserve's balance sheet reduction plan may soon enter its final phase, with discussions on ending the tapering timeline expected in upcoming meetings due to signs of liquidity tightening in the market [1][7]. Group 1: Balance Sheet Reduction - The Federal Reserve's balance sheet has been shrinking, with holdings of U.S. Treasuries decreasing from approximately $5.8 trillion to $4.2 trillion, and mortgage-backed securities (MBS) dropping from about $2.7 trillion to $2.1 trillion [2]. - The liquidity has shifted from reverse repos and bank reserves to the U.S. Treasury cash account, which has increased to around $680 billion and is projected to rise to about $850 billion in the coming weeks [2][5]. Group 2: Market Pressure Signals - The overnight secured financing rate (SOFR) has been above the interest on reserve balances (IORB) for most of September, exceeding it by 11 basis points recently, indicating rising pressure in the repo market [1][5]. - As reverse repo balances approach zero, additional liquidity flowing into the Treasury cash account will primarily come from bank reserves, which are expected to decline to approximately $2.8 to $2.9 trillion by year-end [5]. Group 3: Future Expectations - Citigroup anticipates that if repo market pressures persist, the Federal Reserve may conclude its balance sheet reduction by the end of this year, although a specific timeline has yet to be determined [1][7]. - The current market pressure is relatively mild compared to the 2018-2019 period, suggesting that the Federal Reserve is better prepared to address liquidity issues, which may lead to a smoother policy transition [7].