Quarter-End Liquidity Stress in Money Markets | MarketWorth
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Quarter-End Liquidity Stress in U.S. Money Markets: What’s Coming in September 2025
By MarketWorth | Published September 13, 2025
1. Introduction
Liquidity stress in money markets tends to concentrate around quarter ends, particularly in the U.S., driven by technical factors like Treasury bill issuance, corporate tax payments, coupon settlements, and shrinking reserves. With September 30th approaching, markets are now bracing for potential funding squeezes that could raise short-term rates, disrupt collateral flows, and increase volatility.
2. Key Drivers of Quarter-End Liquidity Stress
2.1 Treasury Bill Issuance
The U.S. Treasury has been significantly increasing short‐term bill issuance to replenish its cash balances and roll over maturing obligations. Investors demand attractive yields, but this issuance absorbs cash from the banking system and from money market funds.
According to SIFMA, as of end-August 2025:
| Metric | Value | Year-over-Year Change |
| Gross Treasury Market Issuance YTD | $19.4 trillion | +1.9 % YoY |
| Outstanding Treasury Securities | $29.4 trillion | +6.6 % YoY |
| Average Daily Trading Volume (Primary Dealers) | $1,071 billion | +18.8 % YoY |
This amount of issuance, especially in short-dated bills, increases pressure on reserves and funding liquidity. Barron’s recently reported record size for 4-week T-bill auctions (≈ $100 billion) reflecting this trend. 0
2.2 Corporate Tax Payments & Technical Drains
Large corporations have quarterly tax obligations to the U.S. Treasury that fall due at the end of September. These payments remove cash from the banking system. Combined with coupon and settlement demands, these drains act like mechanical liquidity pull-backs.
2.3 Federal Reserve Balance Sheet Runoff & Reserve Levels
While reserves remain higher than pre-pandemic norms, the Federal Reserve has been reducing its balance sheet. The runoff of holdings of Treasuries and mortgage-backed securities reduces the cushion of liquidity that banks and dealer institutions can draw upon. For example, as of September 10, 2025:
| Asset Class | Total (USD billions) | Recent Trend |
|---|
| Securities Held Outright (Treasury Securities All) | $4,200,916 million | Stable but slightly declining week-to-week. 1 |
| Reverse Repurchase Agreements (RRP) | $382,956 million | Elevated RRP usage; recent decline – but still important drain. 2 |
2.4 Repo Market Pressure & Funding Costs
Repo rates (including the rates in the tri-party and GCF repo markets) tend to spike when market participants face short-term funding needs and collateral scarcity. According to SIFMA repo statistics, volumes remain high, and demand for high-quality collateral (e.g. Treasury securities) is increasing. 3
2.5 Seasonal & Calendar Effects
Coupled with Treasury, tax, coupon, and settlement demands, banks often anticipate reserve requirements (including regulatory and operational), pushing them to pre-position. This tends to reduce market liquidity in the days just before quarter-end. Traders often recall similar stress episodes in 2019 when the Fed had to intervene via temporary repo operations. 4
3. Recent Data & Indicators (Sept 2025)
3.1 SOFR & Overnight Rates
The Secured Overnight Financing Rate (SOFR) and related spread metrics have shown signs of pressure. Overnight borrowing costs are creeping upward. Bloomberg and Reuters sources report concerns about elevated SOFR-fed funds spreads. 5
3.2 Reverse Repo (RRP) Usage
| Date | RRP Usage (USD billions) |
|---|
| 2025-09-10 | $382.96 billion |
| 2025-09-11 | $26.90 billion |
| 2025-09-12 | $17.33 billion |
| 2025-09-09 | $22.92 billion |
| 2025-09-08 | $19.42 billion |
Note: The big drop from September 10th onward suggests rapid shifts in usage. RRP is one channel through which excess reserves are parked overnight, but as usage declines, more reserves may be staying in the banking system or being withdrawn via other drains. 6
3.3 Fed Assets & Treasury Holdings
As noted, the Federal Reserve holds just over $4.2 trillion in U.S. Treasury securities (all maturities) as of early September 2025, part of its H.4.1 balance sheet release. 7
4. What Could Go Wrong: Risks & Stress Scenarios
- Funding squeeze in repo / overnight markets: If demand for collateral increases (e.g. many institutions want to borrow Treasury bills or high grade collateral), repo rates spike, and non‐dealer banks may have difficulty sourcing funding.
- Tight bank reserves: Even though overall reserves remain elevated, technical drains such as tax payments and Treasury General Account operations can pull reserves down quickly.
- Volatility in short-term rates: Borrowing costs (SOFR, fed funds, O/N repo) may see sharp upward moves if liquidity becomes tight.
- Spillover effects on money market funds & liquidity providers: Money market funds may see stress in terms of redemption pressures or higher yields demanded by counterparties.
- Potential need for Federal Reserve intervention: Through tools like the Standing Repo Facility (SRF) or temporary open market operations, to inject liquidity if needed. 8
5. Mitigation & What to Watch
Market participants, including banks, dealers, money market funds, are likely doing some of the following in advance of September 30:
- Pre-funding: accumulating reserves or collateral in advance to cover tax/TGA drains and settlement obligations.
- Choosing shorter maturities / shorter-dated bills to release cash sooner.
- Using Fed liquidity tools such as SRF; standing repo operations may pick up. 9
- Monitoring RRP usage, overnight repo rates, SOFR movements for early warning signs.
- Watching Treasury issuance schedules, coupon calendars, corporate tax reminders, and reserve projections.
6. Regional & Global Implications
While the bulk of the stress is U.S.-centric, global institutions, including foreign central banks and funds that participate in U.S. repo or hold U.S. Treasuries, are impacted. Cross-border spillovers might include higher funding costs in Eurodollar / FX swap markets, tighter global dollar liquidity, and more demand for “safe haven” collateral. Emerging markets may experience capital flow volatility as U.S. short-term yields rise.
7. Conclusion
Quarter-end liquidity stress is not new, but in 2025 it comes with compounding factors: high Treasury issuance, strong tax/coupon drains, shrinking reserves, and rising funding costs. While the risk of a major crisis is not guaranteed, markets should prepare for tighter liquidity in short-term funding markets, upward pressure on rates, and potential Federal Reserve intervention. Monitoring key indicators—SOFR, RRP usage, Treasury schedule, reserve levels—will be critical in the coming weeks.
Frequently Asked Questions
What is “liquidity stress” in money markets?
Liquidity stress refers to conditions where it's harder or more expensive for institutions to borrow or source cash (or high-quality collateral), usually over very short periods (overnight or within days). This can lead to spikes in repo rates, tighter spreads, and reduced market functioning.
Why does Treasury bill issuance matter for liquidity?
Because when the Treasury issues short-term bills in large amounts, institutions buy them with cash. That cash leaves the banking system (or money market funds) and lowers the pool of reserves banks can use for overnight funding or to lend. It’s a technical drain on liquidity.
How big is the Fed balance sheet effect?
The Federal Reserve's holdings of U.S. Treasuries and mortgage-backed securities act as a cushion for liquidity. As the Fed allows securities to roll off without reinvesting (runoff), that cushion shrinks, reducing backstop liquidity. Current data show ~$4.2 trillion in U.S. Treasury securities held outright, plus large but declining reverse repo (RRP) and other liquidity facilities. 10
What are SOFR and RRP? Why do they matter?
SOFR (Secured Overnight Financing Rate) is a benchmark rate for overnight borrowing collateralized by U.S. Treasuries. RRP (Reverse Repurchase Agreements) are agreements in which the Fed sells securities to counterparties with a promise to buy them back, essentially a way to park excess cash. High usage of RRP and rising SOFR can signal tightness in funding markets.
Will the Fed step in to ease stress?
Potentially yes. The Fed has tools such as the Standing Repo Facility, temporary open market operations, and can adjust reserve requirements or slow down balance sheet runoff to inject liquidity. The confidence of markets depends on how clearly these tools are communicated and whether participants have pre-positioned for stress. 11
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