Core Viewpoint - Pressures in the $12 trillion short-term funding market are prompting calls for a more aggressive response from the Federal Reserve to alleviate financial strains [1][2]. Group 1: Market Conditions - Major financial institutions, including Bank of America, SMBC Nikko Securities, and Barclays, are suggesting that the Federal Reserve may need to increase lending in short-term markets or directly purchase securities to inject liquidity into the banking system [2]. - Recent weeks have seen key short-term rates, including those tied to overnight repurchase agreements, remain elevated, with the Fed's policy target rate rising four times within its range over the past two months [3][6]. - The Secured Overnight Financing Rate experienced its largest one-day movement outside of a Fed interest-rate hiking cycle since March 2020, indicating significant market volatility [4]. Group 2: Contributing Factors - An increase in Treasury bill issuance has drained cash from short-term markets, contributing to liquidity issues in the banking system [5]. - The recent government shutdown exacerbated liquidity problems by delaying federal spending, which would typically enhance market liquidity [5]. - The Federal Reserve's ongoing quantitative tightening efforts have also contributed to the tightening of reserves in the banking system [5][6]. Group 3: Federal Reserve Response - Despite the Fed's announcement to halt the unwinding of its Treasury holdings starting December 1, concerns remain that this may not fully resolve the liquidity issues [6]. - The New York Fed's Roberto Perli indicated that rising funding costs signal a scarcity of reserves in the banking system, suggesting that the Fed may soon need to purchase assets to address these strains [7].

The U.S. Secured Overnight Financing Rate (SOFR) rose by 18 basis points to 4.22% on November 3, marking its largest single-day increase in a year. The spike may have been driven by heightened government shutdown risks prompting the U.S. Treasury to concentrate short-term debt issuance. The resulting surge in Treasury supply likely drained liquidity from funding markets, pushed up repo rates, and in turn lifted SOFR. https://t.co/gaA7wjoXUp ...