Liquidity hijack. Copyright NextLevelCorporate, 2025.

Where’s all the liquidity gone?

Over the last few weeks, investors have been watching an interesting divergence in the U.S. Federal Reserve’s balance sheet metrics.

On one hand, the Treasury General Account (TGA) is climbing (chart 1), reflecting a government shutdown and cash being held at the Fed.

On the other hand, the reverse repo (RRP) facility, where money market funds and other investors park excess cash overnight (chart 2), has been draining rapidly, even as short-term Treasury bills yield attractive rates.

Why the RRP is draining

The Fed’s RRP facility offers a safe place for cash, but it pays an overnight rate of about 3.75%.

Meanwhile, short-term Treasury bills, the natural alternative for money market funds are yielding roughly 3.8–3.9%.

This creates a simple incentive in that investors can earn more by buying Treasury bills than by parking cash in the Fed’s reverse repo.

The result is that RRP balances are falling, with the latest Wednesday figure at $372 billion, down sharply from the peak levels of over $2.7 trillion.

This shift shows that money is moving out of the Fed facility and back into the broader short-term securities market.

How TGA plays into the story

The TGA receives tax revenue and pays the government’s bills, including wages for government workers.

So, at the same time as the RRP is draining, the TGA is growing (currently hovering around $942 billion) as a result of the government shutdown. A growing TGA pulls liquidity out of the financial system because cash that would otherwise circulate in banks or money market funds is now being held by the Treasury.

In other words, while the RRP account is draining as investors chase better yields in Treasuries, overall liquidity in the financial system is reducing as the TGA rises.

It’s a redistribution effect where money leaves the Fed’s overnight facility, but not all of it flows into productive lending or investment immediately. Some of it simply sits in the TGA.

And for the sake of completeness, the Fed has been running down its balance sheet which now sits at around $6.56 trillion (refer chart 3). This is quantitative tightening (QT). QT means the Fed is reinvesting less of its maturing securities and is reintroducing fewer reserves into financial markets. This is also negative for liquidity.

Broader implications

The combination of draining RRP balances, a rising TGA and QT is having a clear impact on markets:

Liquidity has tightened as cash is leaving the system faster than it is being replenished.
Short-term rates remain attractive, and investors prefer safe Treasuries over riskier assets.
Equities and crypto struggle when there is less liquidity available for risk assets. We can see this in the weak equities and crypto price action of late, other than for the last couple of days (and I’ll touch on the shift below).

Further weighing on liquidity is Japan. It is the biggest foreign buyer of U.S. Treasuries, and the Bank of Japan is now offering a yield of close to 1.7% on its 10-year paper. And with expectations that the U.S. dollar will weaken and Treasury yields retreat, this yield incentivises Japanese and other foreign investors to repatriate funds back home.

If correct, this is another brake on liquidity, especially in short-term money markets. In effect, the dynamics of the carry trade, which are borrowing in low-yielding currencies to invest in higher-yielding U.S. assets can intersect with Federal Reserve liquidity operations, amplifying market tightness and rippling across financial markets.

This combined with the shutdown/TGA dynamic, explains why even with strong data centre construction, AI themed growth, and healthy corporate earnings, we’ve seen muted rallies in both equities and crypto markets.

Essentially, money hasn’t been flowing freely into risk assets because liquidity was being absorbed by the Fed’s QT, the Treasury’s TGA, money markets chasing yields, and an element of capital repatriation.

Well, as of yesterday, that state of play might be about to change

There are a few reasons.

Yesterday morning in the U.S., the Senate passed legislation to end the shutdown. While this still needs to clear the House, if passed and workers receive backpay, this will be positive for liquidity as the TGA balance starts to run down.

Secondly, at the last FOMC meeting the Fed announced it would officially stop shrinking its balance sheet on 1 December 2025 and reinvest all principal payments from maturing securities to stabilise its holdings. That means QT will be at an end, for now. That is also positive for liquidity.

Whether QT is replaced with plain-vanilla quantitative easing (QE), yield curve control (YCC), or something else entirely will depend on how the Bessant Treasury plans to refinance its debt stack.

Regardless, the point is that the Trump administration’s strategy to reverse the liquidity drain and return cash to markets might be just around the corner. Are you ready?

Takeaway

Even in a world of high short-term yields, the interplay between the Fed’s RRP, the Treasury’s TGA, and QT has meant that liquidity has been methodically drained from the financial system. Yields in Japan are contributing to that drain.

However, with a likely end to the shutdown (subject to the House passing yesterday’s bill) and the Fed ending QT on 1 December, liquidity is set to return to markets, pushing up risk asset prices.

Not only that, but the QE Infinity Train to nowhere may not be far behind and that would mean even more liquidity, monetary debasement, and in turn, higher risk asset prices.

This “future state” had started to be priced into equity and crypto markets on Tuesday, and I suspect we’ll see improving risk-asset prices in the weeks ahead, all else being equal. However, it’s unlikely to be in a straight line due to profit taking (see Softbank’s sale of its entire NVDA holdings) and the many political, geopolitical and macro factors currently in play.

Understanding balance sheet, RRP, TGA and QE/QT mechanics is critical for investors and those in corporate development, because markets (and capital/control change opportunities) don’t move solely on fundamentals, they move on expectations of when and where the liquidity/cash will flow.

See you in the market 🖐

Mike

Mike Ganon is based in Australia and is the founder of NextLevelCorporate Advisory and pitchhawk. He writes at the intersection of macroeconomics, financial markets, and corporate development strategy—helping local business owners, leaders and investors translate global moves into actionable opportunities.

The ebb and flow of liquidity—are you ready?