Most people don’t think about liquidity until it’s gone. By the time equities are falling and risk assets are getting repriced, the plumbing has often been tightening for weeks. The question is what to watch on the way in.
This piece is an overview of how I think about real-time liquidity. It isn’t a manual. It’s context for why I spend so much time watching funding markets, and why those flows have often shown up in the data before risk assets reflect the change.
Why Liquidity Matters (Eventually)
Markets don’t always respond to the plumbing in real time. There can be weeks where liquidity is draining, and equities keep rallying — usually because volatility is compressing, options flows are dominating, or a single macro catalyst is overpowering the plumbing.
But liquidity often leads. Many of the larger risk-off moves I’ve tracked — including periods where crypto has weakened ahead of equities and stretches where the S&P 500 has stalled despite “good news” — have been preceded by a measurable tightening of funding conditions. The setup isn’t always tradable in the short term, but it is readable.
The goal is not to generate a trade signal. It’s to make the unseen visible.
What I Watch
Four moving parts tend to matter most: SOFR volumes, the Treasury General Account (TGA), bank reserves, and the reverse repo facility (RRP). Each one tells you something different about where cash is, where it’s going, and what’s funding what. Taken together, they describe the working liquidity of the U.S. financial system on any given day.
Rates alone aren’t enough. Volumes, balances, and flow direction matter more. So do the second-order signals — credit spreads, equity repo financing, ’s behavior, and standing repo facility usage — which tend to confirm or contradict what the primary data is saying.
The work is not in knowing the components. It’s in combining them into a real-time read. That’s what I do daily for subscribers.
Why Today Isn’t 2023
The single most important structural shift over the past two years is that the cash buffer the system relied on in 2023 has largely been depleted. When the Treasury financed deficit spending in 2023, that issuance drew on a pool of idle money parked at the Fed, so the same bill issuance had little market impact.
That pool has been drained. The same issuance today may need to be funded from cash that was previously supporting reserves. Same deficit. Same bills. Different impact — because the funding source changed.
This is the part most commentary misses. “The Fed isn’t doing QT anymore” isn’t the end of the story. The mechanics of how the deficit is financed may matter more than the Fed’s headline stance.
When the Plumbing Led
Three episodes are worth revisiting — because the sequence mattered, and each time, the plumbing tightened first.
September 2019. A well-documented reserve shortage episode. Treasury settlements and corporate tax payments hit the same week, reserves had been drifting lower for months, and on September 17, overnight repo rates spiked well above the Fed’s target range before emergency overnight operations were deployed. The tape was otherwise quiet in the days leading up to it. The plumbing broke first. Rates followed. Equities absorbed the news within hours of the Fed’s response, but the stress had been visible in funding markets for weeks.
March 2020. The COVID shock was broader than a plumbing event, but the plumbing led in its earliest days. A dash for dollars produced selling across every asset class — including Treasuries. Funding markets seized until the Fed deployed an emergency toolkit. The lesson is that everything becomes correlated so quickly when funding breaks down.
November 2025. Bitcoin led the drawdown by a couple of weeks before the equity tape followed. That pattern — crypto weakness preceding risk-off — has been consistent enough across cycles that it belongs in any liquidity read as a confirming signal rather than a primary one.
Not every stress event comes from the plumbing. Some are earnings, geopolitical, and policy shocks. But a meaningful share of the larger equity drawdowns in the post-2018 era have had a plumbing footprint you could see if you knew where to look.
Where the Model Falls Short
This framework isn’t a crystal ball. A few specific limits:
- The tape can diverge for weeks. Mechanical flows — zero-DTE options, single-name earnings, vol compression — may override the liquidity backdrop in the short run.
- Fed intervention may reset everything. If the Fed moves to stabilize reserves or adjust the standing repo facility, the signals may flip quickly.
- Bitcoin can act as a refuge, not just a risk asset. Most of the time, it may track liquidity tightly. Occasionally — when conventional safe havens look less convincing — it may pull away and muddy the signal.
- “Ample reserves” framing can delay the inflection. The Fed may argue that reserves remain ample well past the point at which overnight funding markets are showing signs of stress. Watching the data may beat waiting for Fed language to change.
Why This May Matter Now
A new Fed Chair is expected to take over in mid-May. His stated views — lower rates, a smaller balance sheet, less forward guidance — represent a meaningful regime change from the reflexive “Fed put” framing that markets have priced for 15 years. Whatever that transition produces, the assumption that a funding squeeze will be met instantly with balance sheet support is worth re-examining.
At the same time, recent data suggests funding conditions are tightening. The direction is consistent with the setups that have preceded earlier stress episodes — and the historical precedent worth studying is September 2019, when a plumbing problem in an otherwise calm tape became a market event within a week.
None of that guarantees equities will fall. But it may explain why rallies have felt mechanical, why credit spreads have been flagging divergences, and why precious metals and crypto have been weakening.
This is the framework I use every day.
For Daily Application
The difference isn’t the components — it’s the daily read of how they interact, and when that interaction begins to matter for markets. How SOFR, TGA, and reserves are moving right now, how they’re aligning with credit, FX basis, and the tape, and the specific confirming signals that tell me whether a drain is priced in or still ahead.