Stocks sold off sharply on Friday morning but recovered throughout the day. fell hard all afternoon, which led me to believe that what we were seeing on Friday was positions being closed ahead of the weekend, on the risk that the government shutdown might be resolved. The VIX peaked around noon at 22.7 and fell throughout the afternoon, finishing the day at 19.
However, 1-Day closed at 16.9, which is still somewhat elevated, so it wouldn’t be surprising to see the rally continue on Monday, at least through the first part of the day.
That said, Wednesday and Thursday will be Treasury settlement dates, with $14 billion and $23 billion settling, respectively. That should bring some of those overnight funding pressures we have witnessed in recent weeks. Although I doubt it will be nearly as bad as what was seen at the end of October.
Anyway, there is a lot of misinformation on social media about SOFR “dropping like a stone” and fiscal QE being built up in the TGA. It’s all BS. SOFR did drop—as it should—because the Fed cut rates by 25 bps. But remember: what determines whether SOFR is tight or easy is the spread at which it trades relative to instruments like the effective fed funds rate or the Interest on Reserve Balances (IORB).
By that measure, SOFR is still trading above those instruments, suggesting that pressures have eased but remain tight.
In the meantime, the TGA is targeting a year-end total of around $850 billion, and, as a rule of thumb, the Treasury typically likes to keep at least one week’s worth of liquidity in the account. With the TGA currently at about $950 billion, there’s roughly $100 billion too much sitting in it. This means that when the government reopens, we’ll likely see the TGA fall by about $100-$200 billion.
However, if it drops below $850 billion, the Treasury will likely refill it to that level. So, by that measure, there isn’t a massive amount of fiscal QE entering the system. The TGA shouldn’t drop back to the near-zero levels seen during the debt ceiling period—and if it does, it will just be replenished, as per the Treasury’s latest Quarterly Refunding Announcement, last week.