This coming week will feature both a Fed meeting and a BOJ meeting. Equally important, Monday is a quarterly tax date, which should deliver a big boost to the Treasury General Account (TGA). On the same day, $78 billion in Treasury coupons will also settle. It’s possible the TGA could reach the $850 billion mark by the end of Monday. As of Thursday, the TGA stood at $682 billion.
The only piece of good news is that on September 16, there will be a paydown of about $50 billion, which should help alleviate some of the pressure on reserves. Still, by the time the SOMA report is released on Thursday, I would expect the TGA to be around $800 to $850 billion, with reserve balances at or below the $3 trillion mark. At that point, the liquidity drain from the TGA refill will essentially be complete. However, quarter-end pressures will likely push reserves even lower as we move toward September 30.
SOFR swaps are already pricing in a Fed rate cut on Wednesday, which is why rates have been trading lower. What really matters, however, is the spread between SOFR and the effective funds rate. Assuming a 25 bps cut pushes the effective funds rate down to 4.08%, then an overnight rate of 4.17 to 4.21 would put the spread between 9 and 13 bps above the effective Fed Funds—slightly wider than the 8 bps observed on Friday, when SOFR was at 4.41 versus the Fed Funds rate of 4.33%.
There is no doubt that liquidity will be tighter over the next two weeks, and the window for market turbulence is far from behind us. In fact, I would argue it still lies ahead, given the combination of liquidity pressures, VIX option expiration on Wednesday, quarterly options expiration on Friday, a Fed meeting on Wednesday, and both BOJ and BOE meetings on Thursday. Volatility is more likely to expand this week than contract.
The 10-year yield looks a bit overdone to the downside and appears due for some consolidation or a bounce.
There are plenty of recent examples showing that rates can steepen even while the Fed is cutting. How long bonds respond to a rate cut this week—and, more importantly, to the projected path of monetary policy—will be extremely telling.
Meanwhile, the stock market finds itself in an awkward position: overbought and flashing warning signs. A glance at the Wingstop indicator shows the broader S&P 500 is not in a good place. In fact, it looks eerily similar to January. Wingstop has an uncanny ability to trade about a month ahead of the S&P 500.
On top of that, we now have our “peak stupidity” indicator with Oracle, which has already given back 50% of the gains it made following the OpenAI contract.
-Mike
Terms By ChatGPT
Glossary
Basis points (bps) – One hundredth of a percentage point, commonly used to describe changes in interest rates.
BOE (Bank of England) – The central bank of the United Kingdom, responsible for monetary policy and financial stability.
BOJ (Bank of Japan) – The central bank of Japan, responsible for monetary policy and maintaining financial system stability.
Effective federal funds rate – The weighted average rate at which banks lend balances to each other overnight in the federal funds market.
Liquidity – The availability of cash or easily convertible assets in the financial system that supports lending, investment, and overall market functioning.
Overbought – A market condition in which asset prices have risen sharply and may be due for a pullback or correction.
Quarterly tax date – The deadline when U.S. corporations and individuals make estimated tax payments, often affecting Treasury cash balances.
Reserves – Deposits that commercial banks hold at the Federal Reserve, used to meet regulatory requirements and settle payments.
SOFR (Secured Overnight Financing Rate) – A benchmark interest rate for overnight loans collateralized by U.S. Treasury securities, widely used in derivatives and lending markets.
SOMA (System Open Market Account) – The Federal Reserve’s portfolio of U.S. Treasury and agency securities, used to implement monetary policy.
Spread – The difference between two interest rates, often used to measure relative value or stress in funding markets.
Steepening – A change in the yield curve where long-term interest rates rise faster than short-term rates.
TGA (Treasury General Account) – The U.S. Treasury’s cash balance held at the Federal Reserve, used for government payments and debt management.
Volatility (VIX) – A measure of expected stock market volatility derived from options prices on the S&P 500 index, often referred to as the “fear gauge.”
Wingstop indicator – A market anecdote suggesting that the stock price of Wingstop tends to move ahead of the broader S&P 500 index, used informally as a sentiment signal.
Disclosure
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.