Core Insights - The U.S. financial system's liquidity is deteriorating despite the Federal Reserve's announcement to end quantitative tightening (QT) [1][18] - The use of the Standing Repo Facility (SRF) reached a record high of $50.35 billion, indicating ongoing liquidity issues [1][2] - The SOFR (Secured Overnight Financing Rate) surged by 18 basis points to 4.22%, the highest increase since the last rate hike in 2023 [5][7] Group 1: Federal Reserve Actions - The Federal Reserve decided to end QT but delayed the implementation until December 1, contrary to some market expectations [1] - The SRF was utilized significantly, with $22 billion lent to financial institutions, marking the second-highest usage since its inception [2] - The ongoing QT may continue to withdraw liquidity from an already strained system [18] Group 2: Market Indicators - The spread between SOFR and the effective federal funds rate widened to 35 basis points, the highest since 2020 [6][10] - The three-party general collateral rate (TGCR) also saw its spread with the overnight IORB increase to 25 basis points, indicating tightening conditions [10] - The overall liquidity in the repo market is tightening, with the reverse repo tool usage nearly exhausted [3] Group 3: Treasury and Cash Reserves - The U.S. Treasury's cash reserves exceeded $1 trillion, the highest level in nearly five years, impacting market liquidity [11] - Foreign banks' cash assets have sharply declined, contributing to the tightening of financing conditions [13] - The ongoing government shutdown has forced the Treasury to absorb available funds, leading to a significant drop in bank reserves to $2.85 trillion, the lowest since early 2021 [14] Group 4: Future Implications - The current liquidity crisis may worsen if the government shutdown continues, creating a negative feedback loop similar to past financial crises [18] - A resolution to the government shutdown could lead to a significant influx of liquidity into the market, potentially driving a rally in risk assets [19][21] - The fate of capital markets may hinge on political decisions regarding the government reopening, with implications for various liquidity-sensitive assets [21]