So what's the bottom line regarding increased/decreased liquidity for the markets?
Bottom line on liquidity: TGA drawdowns push reserves into the banking system, which tends to support asset prices. TGA refills pull reserves out, tightening conditions. Right now the TGA is rebuilding after hitting the debt ceiling, so we're in a drain phase.
But liquidity isn't just reserves. It's also credit creation, bank lending standards, margin availability, dealer balance sheet capacity. You can have high reserves and tight liquidity if banks won't lend or dealers won't make markets.
The cleaner signal is bank reserves relative to regulatory requirements. When reserves are abundant above the LCR threshold, liquidity flows freely. When reserves get tight, friction shows up in repo rates, funding spreads, and bid-ask widths. Watch SOFR and the overnight repo rate for stress signals, not just the TGA balance.
But liquidity isn't just reserves. It's also credit creation, bank lending standards, margin availability, dealer balance sheet capacity. You can have high reserves and tight liquidity if banks won't lend or dealers won't make markets.
The cleaner signal is bank reserves relative to regulatory requirements. When reserves are abundant above the LCR threshold, liquidity flows freely. When reserves get tight, friction shows up in repo rates, funding spreads, and bid-ask widths. Watch SOFR and the overnight repo rate for stress signals, not just the TGA balance.