Dear Readers,
The framework I began developing back in July — linking liquidity, volatility, and market structure — is now coming together in real time. Liquidity has tightened sharply, reserve balances have fallen toward $2.8 trillion, and the Treasury General Account has surged to around $1 trillion, well above its target. This combination is straining the funding markets, pushing repo rates above the Fed’s target range, and driving the highest usage of the Standing Repo Facility since COVID.
These pressures are more than short-term noise. The ongoing rise in the TGA and continued QT mean liquidity will stay constrained into year-end. History shows that as reserves fall, volatility and credit spreads tend to rise — and that’s what we’re beginning to see beneath the surface. While the S&P 500 has held up thanks to mega-cap strength, equal-weighted indices, regional banks, and private equity names are showing the stress more clearly.
Meanwhile, volatility dynamics are shifting. Realized vol has fallen to extremely low levels — the kind that often precede major reversals — and the dispersion index is now dropping as post-earnings single-stock volatility unwinds. That’s leading to higher implied correlation across stocks, a sign that markets are becoming more synchronized and fragile.
The relationship between liquidity and volatility remains the key theme. Today’s video walks through the data — from reserve balances to dispersion spreads — showing how the setup we identified months ago is unfolding.
This is the kind of forward-looking research and context I aim to deliver in Navigating The Market. My goal isn’t to predict every short-term move, but to help you see what’s developing beneath the surface — and understand how liquidity and volatility dynamics shape the market environment.
If you’ve been thinking about joining as a paid subscriber, now’s a great time. The themes we began tracking months ago are unfolding in real time, and I’ll continue updating this framework as the story evolves in the weeks ahead.
Take care,
Mike
Liquidity pressures are mounting as the Treasury General Account (TGA) expands and Fed QT continues to reduce reserve balances, straining overnight funding markets and increasing volatility risk. As earnings season concludes and dispersion trades unwind, the S&P 500 could face renewed downside pressure amid tightening liquidity and rising implied correlations.
Fully Edited Transcript by ChatGPT
Hi everyone. A lot has been happening in the market over the past week—excitingly, many of the themes we’ve been tracking since July are now starting to converge. Today, we’ll review those developments and discuss their broader implications. But before diving in, please remember to subscribe to the channel, like the video, and share it with your friends so we can continue to grow as we head into 2026.
To start with a quick recap, the S&P 500 rose about 71 basis points this week. However, I think we’re approaching a turning point. One major factor is the growing stress and strain in market liquidity. Over the past week, the Treasury General Account (TGA) has climbed toward the $1 trillion mark. On Monday, we’ll get the quarterly refunding announcement, which will clarify where the Treasury expects to maintain the TGA balance through year-end and into the first quarter of 2026.
The TGA was previously targeted to finish December at $850 billion, implying it’s currently overfunded by roughly $150 billion. The ongoing government shutdown is likely contributing to this buildup. Depending on outlay expectations, Treasury could maintain the $850 billion target or raise it toward $900 billion, $950 billion, or even $1 trillion. The Treasury typically holds roughly one week’s worth of outlays in the TGA, which has led to a noticeable drain in reserve balances.
Reserve balances fell to $2.8 trillion this week, and my own daily estimates suggest they may have dropped another $50–$100 billion since Wednesday. My model tends to run slightly low, but the takeaway remains that liquidity continues to be absorbed from the system as the TGA rises. This tightening has led to visible strain in the overnight funding market, reflected in heavy usage of the Fed’s Standing Repo Facility (SRF).
The SRF data, published by the New York Fed twice daily, showed $50 billion in usage on Friday alone—the highest level since the COVID crisis. This occurred because funding rates were trading above the upper end of the Fed’s target range. Currently, the Fed’s target rate is 3.25%–4%, and institutions can access SRF liquidity when general collateral (GC) rates exceed that ceiling.
Although the Fed cut rates to 3.25%–4% this week, GC rates only fell to 4.1%, still 10 basis points above the effective funds rate of 3.87%. On Friday, GC spiked again to 4.29%, meaning the overnight rate traded 39 basis points above the interest on reserve balances (IORB), which sits at 3.9%. That’s a strong signal of stress in short-term funding.
This pressure should ease slightly on Monday, as month-end and Treasury settlement effects fade. Last week’s settlements drained over $110 billion from the system, whereas next week’s are expected to remove only about $50 billion. Still, the broader liquidity picture remains tight as long as the TGA climbs and QT continues. The Fed has indicated QT will persist at least through December 1. If the Treasury maintains the $850 billion TGA target, roughly $150 billion could be released, modestly restoring reserves toward $3 trillion.
However, a true easing of liquidity likely won’t occur until the Fed expands its balance sheet again—something that may not happen until the first or second quarter of 2026. Chair Powell could leave that decision to his successor.
From a market mechanics standpoint, falling reserve balances have historically correlated with higher implied volatility. When liquidity is abundant, volatility tends to be subdued; when it tightens, volatility rises. A comparison of reserve balances and the VIX 50-day exponential moving average shows this relationship clearly. A similar relationship exists between liquidity and high-yield credit spreads, which often widen as volatility rises and liquidity falls.
While the S&P 500 hasn’t yet reflected this pressure due to its mega-cap weighting, equal-weighted and sector-specific indexes such as the RSP, PSP (private equity), and KRE (regional banks) show more direct signs of liquidity stress. Market breadth remains poor, suggesting weakness beneath the surface.
Additionally, three-month realized volatility has recently been very low—a pattern seen before sharp market corrections in 2018 and 2020. As volatility begins to rise again, a “blow-off” top followed by a pullback becomes increasingly plausible.
We’re also observing changes in implied volatility dispersion. Now that most mega-cap earnings are complete—aside from NVIDIA—single-stock implied volatilities are falling. The “dispersion trade,” which involves buying single-stock volatility and selling index volatility, is unwinding. As this occurs, the VIX constituent volatility index is converging toward the broader VIX index, bringing down dispersion and pushing up implied correlations. In other words, individual stocks are beginning to move more in sync with the index.
When implied correlations rise and dispersion falls, the S&P 500 often follows suit, as this relationship captures underlying shifts in market structure. Taken together, tightening liquidity, an unwinding of dispersion trades, and elevated volatility risk suggest the index could begin trending lower.
In short, liquidity will likely remain constrained until the Fed shifts its balance sheet stance, and dispersion dynamics now favor broader market softness. Keep monitoring funding rates, reserve balances, and implied volatility measures closely—they’re key indicators for where equities may be headed next.
As always, please remember to subscribe, like, and share the video. I discuss these topics daily in the member area with more real-time detail. Thanks for watching, and have a great weekend.
Defined Terms and Jargon by ChatGPT
TGA (Treasury General Account) – The U.S. Treasury’s main operating account at the Federal Reserve used to manage government cash flows.
QT (Quantitative Tightening) – The Federal Reserve’s process of reducing its balance sheet by allowing securities to mature without reinvestment, thereby tightening liquidity.
Reserve Balances – The amount of cash that commercial banks hold at the Federal Reserve; a key measure of market liquidity.
Standing Repo Facility (SRF) – A Federal Reserve facility allowing eligible institutions to borrow cash overnight in exchange for Treasury collateral.
General Collateral (GC) Rate – The interest rate for overnight borrowing of cash secured by general collateral, typically U.S. Treasuries.
Interest on Reserve Balances (IORB) – The interest rate the Fed pays on deposits held by banks at the Fed.
SOFR (Secured Overnight Financing Rate) – A broad measure of the cost of borrowing cash overnight collateralized by Treasuries.
VIX Index – A popular measure of expected stock market volatility derived from S&P 500 options pricing.
Implied Volatility – The market’s forecast of a stock’s or index’s future volatility, derived from option prices.
Dispersion Trade – A strategy that involves buying volatility in individual stocks and selling volatility at the index level.
Implied Correlation – A measure of how similarly individual stock prices are expected to move relative to an index.
Credit Spreads – The difference in yield between corporate bonds and comparable-maturity Treasury securities; widening spreads indicate rising credit risk.
RSP / PSP / KRE ETFs – Exchange-traded funds representing equal-weighted S&P 500 (RSP), private equity (PSP), and regional banks (KRE).
Disclaimer
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.