Liquidity Drain Continues...
The volatility crush today was larger than I expected, especially since the VIX1D barely topped 16 yesterday. Still, it was enough to lift S&P 500 futures about 60 bps at the open, after which volatility was steadily crushed throughout the day. As usual, once the VIX bottomed, the market struggled to push higher.
One notable development in the equity market today is that S&P 500 futures reached the July 31 level and stopped there—a full 100% retracement of the August 1 decline. It may mean nothing, but it’s worth noting.
The interesting thing now is that 10-day realized volatility closed up a full point at 13.71 from 12.71 yesterday. Meanwhile, 21-day realized volatility rose to 10.19 from 9.56. This matters for two reasons: first, the VIX is trading at 14.7; second, 1-month realized volatility is likely to cross above 3-month realized volatility, which could prompt volatility players to sell the market. I can’t say for certain, but if market-on-close imbalances keep coming in larger, as they have over the past two days, this could be why. Worth keeping an eye on.
Meanwhile, don't tell the owners of ServiceNow and Salesforce stocks are going higher, because they have gone lower. again... Makes you wonder why?
Today, the reverse repo facility dropped to $57 billion from $82 billion on Monday, as the cash drain continued and the TGA climbed to $504 billion. Today’s $55 billion Treasury settlement will be followed by $42 billion on Thursday and another $35 billion on Friday. If roughly half of these settlements are funded through the reverse repo facility, balances could fall to around $20 billion or less by week’s end.
Next week, the reverse repo facility is expected to begin rising as GSE cash enters the overnight market. If the TGA continues to increase at the same time, it would create a double drain on liquidity.
-Mike
Terms by ChatGPT
Defined Terms and Jargon
Volatility Crush – A rapid decline in implied volatility, often occurring after a market event or data release, which reduces options premiums.
VIX / VIX1D – The CBOE Volatility Index measures expected market volatility over 30 days; VIX1D is its 1-day version.
bps (basis points) – One basis point equals 0.01%; 60 bps means 0.60%.
Realized Volatility – A measure of actual historical market price fluctuations over a given time period.
Market-on-Close (MOC) Imbalances – Large buy or sell orders placed for execution at the market close, which can impact closing prices.
Reverse Repo Facility – A Federal Reserve tool where it borrows cash overnight from eligible counterparties in exchange for securities, helping manage short-term interest rates.
TGA (Treasury General Account) – The U.S. Treasury’s account at the Federal Reserve, used to manage government cash flows.
GSE (Government-Sponsored Enterprise) – Financial services corporations created by Congress to enhance credit flow in targeted sectors, such as Fannie Mae or Freddie Mac.
Treasury Settlement – The process by which the purchase or sale of U.S. Treasury securities is finalized, involving the transfer of cash and securities.
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