Core Viewpoint - Barclays Bank predicts a significant decline in bank reserves below $3 trillion in September due to the reconstruction of the U.S. Treasury account, quarterly tax payments, and bond settlements, but the risk of severe "funding squeeze" remains low due to market resilience and the Federal Reserve's backup tools [1][3]. Group 1: Factors Leading to Liquidity Drain - The report identifies three main drivers contributing to the sharp decline in reserves in September, particularly around mid-month [4]. - The U.S. Treasury plans to restore its cash balance at the Federal Reserve (TGA) to a target level of $850 billion, which will inherently withdraw liquidity from the banking system [5]. - The quarterly tax payment deadline on September 15 is expected to result in approximately $100 billion or more flowing into the TGA, with an additional $30 billion on the 16th [6]. - On September 15, there will also be about $80 billion in net coupon settlements, with over $100 billion in settlements by the end of the month [7]. - The combined impact of tax and bond settlements on September 15 could withdraw nearly $200 billion in reserves from the banking system, leading to total reserves dropping below $3 trillion in mid-September and further declining to below $2.9 trillion by the end of the month [8]. Group 2: Market Resilience - Despite the looming liquidity shock, Barclays believes the market is prepared to handle the situation [10]. - The market has demonstrated its absorption capacity, having "calmly" digested up to $350 billion in net short-term Treasury issuance in August, with only a slight increase in the Secured Overnight Financing Rate (SOFR) [10]. - The pace of Treasury issuance is expected to provide a buffer in the second half of September, with a net short-term Treasury issuance of approximately $30 billion, and the net issuance turning negative due to the maturity of cash management bills (CMBs) [10]. Group 3: Federal Reserve's Backup Tools - The report emphasizes that the Federal Reserve's Standing Repo Facility (SRF) is crucial for mitigating tail risks in the market [12]. - The SRF allows eligible counterparties to borrow cash from the Federal Reserve at a fixed rate, providing a reliable liquidity ceiling for the market [12]. - The Federal Reserve has been enhancing the effectiveness of the SRF, including adding morning operation windows before the end of the quarter to lower usage barriers [12]. - Additionally, the report mentions that the Federal Reserve may introduce term repo operations to provide longer-term liquidity support in response to fluctuations in the Treasury account [12]. Group 4: Market Pricing and Vigilance - The report analyzes whether the risks have been priced into the market, noting that reserves as a percentage of total bank assets will drop below 12% but remain slightly above the "adequate level sweet spot" of 11% [13]. - The September interest rate futures market indicates that SOFR is expected to be about 4 basis points higher than the federal funds rate, which Barclays considers a "fair" pricing reflecting a certain "insurance premium" for the mid-month reserve decline and quarter-end volatility [13]. - Overall, the report conveys a clear message that while September's liquidity tightening will be severe and rapid, the risk of a systemic funding squeeze is low due to existing market resilience and strong Federal Reserve support [13].