Making Hay Monday – November 10th, 2025

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David Hay

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Haymaker

Making Hay Monday

The Slippery Slope of Diminishing Liquidity

“I think the notion that liquidity is this… great contributor to capitalism – I think that mostly twaddle… The liquidity gives us these crazy boom, which have many problems as well as virtues.” – Charlie Munger

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There seems to be a widespread notion these days that the decade-plus of monetary stimulus and synthetic liquidity has turned the global financial system into a bulletproof, self-healing organism. Lately, though, we’ve started to see subtle but persistent signs that something is cracking beneath the surface.

The collateral damage from the blow-up of several widely held private credit-funded companies, such as First Brands and Tricolor, seems to be at least partially metastasizing. It’s not yet on the level of a subprime mortgage meltdown or a GFC-style credit collapse. But across the global money markets, the lifeblood of the financial system, stress is building with unsettling similarities to 2019.

You may recall the prevailing conditions that year. It was pre-COVID, pre-stimulus bazooka, and pre-$5 trillion of additional Fed balance sheet blotation. But by September, seemingly out of left field, short-term funding rates in the U.S. spiked violently. The repo market seized up and banks wouldn’t lend to each other. The Fed had to inject over half a trillion dollars (with a T) just to keep the overnight plumbing from freezing solid.

Back then, it was treated as a sort of technical anomaly. But now, in late 2025, we’re watching the same key pressure gauges flash caution once again. This time, while the setup is different, it’s not necessarily better. What’s unfolding now is a result of two opposing forces ramming headfirst into each other. On one side, you’ve got central banks pulling back after a decade of firehose liquidity. The Fed has shrunk its balance sheet by $2.2 trillion over the past three years. Similarly, the U.S. government has spent down its “checking account”, the Treasury General Account (TGA), to minimal levels.

On the other side of the ledger, you’ve got governments issuing debt like the good times never ended. Trillions in new bonds are being churned out to fund deficits, wars, green dreams, and vote-buying tax breaks. Consequently, supply is surging even as demand, at least from central banks, is retreating. That combination is draining liquidity from the system. Not hypothetical liquidity, but actual, usable cash in the funding markets where banks, dealers, and large institutions borrow from each other to keep things humming along. In essence, the funds needed to finance these crisis-like deficits has to come from somewhere, in this case the private sector, creating the classic “crowding out” scenario.

Let’s start with the U.S., which is still the world’s anchor market for dollar liquidity. The Fed’s main mechanism for draining excess reserves (the overnight reverse repo facility) is basically empty. The Treasury, as noted above, has been rebuilding its cash balance at the Fed (the TGA) after yet another debt-ceiling farce earlier this year. That rebuild has sucked more dollars out of the system. At the same time, the Fed has maintained a hawkish stance, keeping its balance sheet runoff on autopilot… until now. Consequently, short-term borrowing rates, especially repo rates, have spiked.

Federal Reserve Bank of New York

The overnight general collateral repo rate recently hit 4.32%, well above the upper bound of the Fed’s own target range (3.75% to 4%). That’s not supposed to happen outside of quarter-end or debt auction settlement days. Even more telling, multiple repo benchmarks have risen above the rate the Fed pays banks to hold reserves (IORB, or Interest on Reserve Balances). In normal times, money market rates float below that level. When they don’t, it’s a signal that cash is tight. It’s also the first time since 2019 (outside of known calendar anomalies) that repo rates have persistently broken the Fed’s upper target band. That’s a pretty big red flag that something’s off in the world’s most systemically important money market, and the Fed noticed.

Last week, the Federal Reserve quietly announced it would stop shrinking its Treasury holdings as of December 1st. The balance sheet runoff, the same one that’s drained nearly $2.2 trillion in liquidity, is ending. Officially, the Fed chalked it up to “elevated stress signals.” Unofficially, the repo market made it clear: either they inject liquidity, or the gears would start grinding.

If the U.K. has been a model of monetary mishaps in recent years, then it’s no surprise that its money markets are also under pressure. Sterling repo rates have become increasingly erratic. Just this past week, the Bank of England’s (BOE) official gauge of overnight repo costs (known as RONIA) jumped to 4.28%, a 28-basis-point (0.28%) premium over the central bank’s deposit rate. That may not sound like much, but in this corner of finance, where basis points are usually handled with tweezers, it’s a brick through the windshield.

The cause?

A combination of the BOE continuing to unwind its balance sheet (i.e., sell gilts, its government debt), banks repaying pandemic-era loans, and a general shortage of cash collateral.

Banks are now scrambling to plug that gap by borrowing from the BOE itself. Just this past week, they tapped a one-week repo operation for £98 billion, which marks the largest draw on record. This is what the BOE calls its “repo-led operating framework.” Or, in words that make more sense: they’re hoping to replace the ocean of excess reserves with a more nimble lending program. So far, the market’s response has been something short of confidence-inspiring. As one Barclays strategist put it bluntly: “Liquidity is leaving the market rapidly.” And in a system that’s grown used to liquidity abundance, that transition isn’t painless.

Sourced via ZeroHedge

The eurozone has, for now, avoided the more dramatic spasms seen in the U.S. and U.K., but the direction is the same. The ECB’s deposit facility is being drained, and unsecured lending rates, like the Euro Short-Term Rate (ESTR), have crept up, gradually converging with the ECB’s policy rate. That narrowing spread suggests excess cash is no longer so excessive. Demand for funds is rising, and with it, the price of overnight money. This certainly looks a lot like the slow burn of a liquidity crunch that gradually tightens, day by day, until the stress is too large to ignore.

Sourced via ZeroHedge

In China, the picture is fuzzier, but still interesting.

On the surface, repo rates in the domestic interbank market remain subdued. But bond yields are creeping higher, and the People’s Bank of China (PBOC) has now signaled that it will soon resume open market bond purchases, a move it hasn’t made since January. That alone should raise some eyebrows since China doesn’t do QE in the Western sense. When it does intervene, it’s usually to lean against a serious structural issue. In this case, the message is clear: credit is tight, borrowing costs are rising, and the central bank is preparing to grease the system before something seizes. China’s pivot also speaks to a broader and more harsh reality: even in centrally planned economies, liquidity is no longer guaranteed.

Sourced via ZeroHedge

So where does all of this net out?

After years (arguably a decade) of functioning in a world where central banks flooded the system with reserves, global money markets are now having to relearn how to operate in a more normalized environment. At least, that’s the charitable view.

The more realistic explanation is that we’re watching the withdrawal symptoms of an addiction to cheap liquidity. And while central banks canintervene if things go sideways, the question increasingly isn’t whether they can, but whether the liquidity gets to where it’s needed. As ING strategist Michiel Tukker put it: “Global money markets will all need to find their way in a world without excessive reserves.” There’s plenty of liquidity in theory, but less and less in the places that actually matter when collateral shortages hit, or banks get spooked, or repo fails start to multiply.

In an era where fiscal dominance is the rule, not the exception, and governments are issuing record amounts of debt even as central banks try to pull back, the margin for error in funding markets keeps shrinking. For investors, this means that volatility in the “safest” parts of the market is going to rise. In the high risk/high momentum areas, price swings have already become much more pronounced and with a rising bias to the downside (see Bitcoin and, especially, Ethereum). It also means that liquidity-driven rallies, especially in asset classes far removed from real cash flow, are on increasingly shaky ground.

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And now let’s get to this week’s individual stock spotlight……