Barclays' latest research report released on August 15 pointed out that the market will face a sharp reserve depletion in September, especially in the middle of the month There will be a huge liquidity shock point.

However, the report's core idea is that despite the large and rapid "pumping", there is a high probability that a systemic financing crisis will be avoided as the market has shown resilience and the Fed has deployed key backup tools.

A liquidity test of "money being siphoned off" is on the way

The report provides a detailed analysis of the three main drivers that led to the sharp decline in reserves in September. The superposition of these factors, especially in the middle of the month, will constitute a serious test.

Let's first explain a term: TGA (Treasury General Account), which is the account of the U.S. Treasury Department at the Federal Reserve, which is equivalent to its "cash wallet". This wallet has been empty for the past few months. Now, the Treasury Department plans to add it back to $850 billion.

How to add? "Pump money" from the banking system and deposit it. This money, which was originally the bank's reserve for the Federal Reserve, is now being withdrawn, which is equivalent to the liquidity of the market being sucked away. This process is ongoing, but focused on accelerating in September.

September 15 is the quarterly tax deadline for U.S. companies. On this day, thousands of businesses will pay taxes to the Ministry of Finance. Barclays predicts: September 15: About $100 billion in taxes will flow into the TGA; September 16: Another $30 billion. This money was originally in the banking system and was the "blood" of market liquidity. Once it enters the TGA, it is "frozen", and the bank's loanable funds are directly reduced.

Don't forget, there are also interest payments on government bonds. On September 15, about $80 billion of net coup was settled; By the end of September, there was more than $100 billion in interest to be paid. Although the money will eventually return to the market (paid to bondholders), the Treasury must first "prepare" the money in the TGA account before it can be paid. Therefore, the Ministry of Finance should "draw blood" in advance to save money, further exacerbating the short-term financial shortage.

The result: the total reserves of the banking system will fall below $3 trillion; It could fall below $2.9 trillion by the end of the month. This will be one of the lowest levels this year, and short-term liquidity in the market is facing a significant tightening.

Although the impact looks scary, the market can withstand it

Although the liquidity shock may seem menacing, Barclays believes the market is ready for this scenario.

Let's start with a key fact: in August, the U.S. Treasury issued a net of $350 billion in short-term Treasury bonds, which was also liquidity "sucked" from the banking system. But what is the result? The secured overnight financing rate (SOFR) only rose slightly, and the overall market was calm. The current financial system is already "immune" to large-scale liquidity withdrawal. Unlike in the past, when there was a storm, "interest rates jumped", but now it is much more stable.

Do you think the Treasury will only "pump money" in September? Wrong. It is actually "releasing water", and the timing is just right. The key buffer point, the net issuance in September was very small, and the net issuance of short-term Treasury bonds for the whole month was only about $30 billion, far lower than the 350 billion in August.

CMB maturity is equivalent to "repaying money" in disguise. What's more, cash management notes (CMBs) issued in early July will mature in the second half of September, which means the Treasury will have to pay it back!

Therefore, the net issuance of treasury bonds in the second half of September will turn negative - equivalent to the return of funds to the market and hedge against the "pumping" pressure in the middle of the month. It's like you pay a big account in the middle of the month, your salary arrives at the end of the month, and your cash flow comes back. The pressure is short-term, but overall balanced.

The most reassuring thing is that the Fed has long prepared a "bailout tool". Standing Repo Facility (SRF): The market's "lender of last resort" SRF allows qualified financial institutions to borrow cash from the Federal Reserve at a fixed rate when needed. It is like a "liquidity insurance", when the market is tight, institutions can immediately "borrow money" from the Fed to avoid panic selling.

Barclays particularly emphasized that SRF is the key to eliminating tail risks in the market, and it sets an "interest rate cap" for the entire system, so that no one dares to easily "grab money with high interest rates". Moreover, the Fed is still optimizing this tool, adding a morning operation window before the end of the June quarter to facilitate institutional use, continue to communicate, and enhance the market's trust and willingness to use SRF. Now, everyone no longer regards SRF as a "stigma tool", but really dares to use it and is willing to use it.

If the pressure is greater at the end of the quarter or the end of the year, the Fed also has a "backup weapon": Term Repo, which provides liquidity for 7, 14 days or even longer periods instead of overnight, which is especially suitable for dealing with cross-quarter and New Year's Eve financial constraints.

In light of the TGA reconstruction and fiscal fluctuations, the market generally expects the Fed to restart regular buybacks at the end of September or December. It's like sending out "red envelopes" in advance to give the market peace of mind for the holidays.

Risk is priced in, but vigilance is required

For investors, the core question is whether these risks have been priced in by the market.

The report analyzed that although reserves will fall below 12% of total bank assets, it is still expected to be slightly higher than Barclays' "sweet spot of adequacy" - 11%. Although this is a low that has never been touched in this cycle, it has not yet entered the danger zone.

From a market pricing perspective, the interest rate futures market in September showed that the secured overnight financing rate (SOFR) is expected to be about 4 basis points higher than the federal funds rate. Barclays believes this is a "fair" pricing because its own forecast is 3 basis points higher, indicating that a certain "insurance premium" is already included in market prices to deal with falling reserves in the middle of the month and volatility at the end of the quarter.

All in all, Barclays' report sends a clear signal: the liquidity tightening in September will be drastic and rapid, however, the risk of systemic tightening is low due to the market's already resilience and the Fed's strong backup support.