Seasonality Slight of Hand Into Year End
QT End Means Bond Stuffing Begins Again
After a prolonged liquidity drainage - as discussed in my big Repo piece a month ago - the Fed’s QT officially ends today (Dec 2, 2025).
Reserves dipped to lows in October and have stayed there, which contributes to Standing Repo Facility usage at near-COVID highs.
Goldman projects the Fed will pivot to balance sheet growth, purchasing ~$20B/month in T-bills from Jan 2026 onward - plus reinvesting Mortgage Backed Securities (MBS) runoff. Together that injects ~$40B/month total.
Heavy Treasury issuance however (due to ever rising fiscal deficits) is still the problem!
Even with the Fed absorbing ~$480B of 2026 T-bill supply, that still leaves non-Fed buyers with ~$390B to ‘absorb’. [Geoffrey calls it “bond stuffing”.]
Funding market stress would manifest in rising USD, so this bears watching.
And the ~$2T in MBS roll off risks flooding the markets with mortgage-backed securities few want, potentially spiking mortgage rates while putting downward pressure on housing.
So overall, while QT ending seems bullish for equities, liquidity challenges continue - across REPO and MBS supply... even before April tax receipts and potential January Round 2 of US Govt Shutdown risks. Look for any headlines where Fed discusses the acceleration of “reserve management purchases”. That’s when we know the strain has worsened and liquidity is badly needed.
Remember, markets don’t rise when liquidity it strained.