FYI

Despite recent market volatility, macroeconomic fundamentals remain largely unchanged. The current sell-off appears to be driven by a liquidity squeeze, intensified by the ongoing U.S. government shutdown, which began on November 3 and has now stretched into its 34th day. This prolonged closure has disrupted normal Treasury operations and drained liquidity from financial markets.

Latest indicators confirm rising stress in funding markets. The Federal Reserve’s Standing Repo Facility (SRF) has seen increased usage in recent sessions, signaling that banks are tapping the Fed for short-term liquidity. The spread between the Secured Overnight Financing Rate (SOFR) and the Interest on Reserve Balances (IORB) — a key measure of market stress — has widened to around 14 basis points (SOFR 4.04% – IORB 3.90% as of October 30–31, 2025). Though not yet extreme, this marks a clear upward trend.

Meanwhile, the U.S. Treasury General Account (TGA) balance has surged to roughly $984 billion, nearly triple its typical range of $300 billion. This means that almost $700 billion of liquidity has effectively been pulled out of circulation — the core reason behind the tightening financial conditions.

The solution is straightforward: once the government reopens, the Treasury will begin drawing down the TGA balance, injecting hundreds of billions of dollars back into the financial system. Such a liquidity reversal would likely support a sharp recovery in risk assets.

Until that happens, however, markets remain vulnerable. Investors should closely watch the SOFR-IORB spread — if it widens further, it could prompt the Fed to consider repo interventions or even renewed quantitative easing to stabilize short-term funding markets.

Prediction markets and analysts such as Goldman Sachs expect the shutdown to end between November 10 and 15, with liquidity normalizing soon after. If that timeline holds, it could pave the way for a 25 bps rate cut in December and potentially ignite a year-end rally across equities and risk assets.