CITIC SEC: After the Federal Reserve stops reducing its balance sheet on December 1, pressure in the US funding market may further ease.

CITIC Securities released a research report stating that factors such as the Federal Reserve's balance sheet reduction, the US Treasury Department's replenishment of TGA funds, and seasonal fluctuations have led to some pressure signals in the US funding market. Several US repo market spread indicators have fallen since the end of October and have continued to decline in November. Currently, funding market pressures have significantly eased, and liquidity pressure is clearly under control. After the Federal Reserve stops reducing its balance sheet on December 1st, funding market pressures may further ease. Key points are as follows: Factors such as the Federal Reserve's balance sheet reduction, the US Treasury Department's TGA fund replenishment, and seasonal fluctuations have led to some pressure signals in the US funding market. Previously, against the backdrop of the Federal Reserve's continuous balance sheet reduction, the Treasury Department continually replenished TGA funds after increasing the debt ceiling, leading to significantly tightening liquidity in the funding market, with declines in reserve balances and reverse repo sizes. Similarly, the repo crisis in September 2019 was also caused by a significant influx of funds into the TGA, tightening market liquidity. The overnight repurchase agreement interest rates and tri-party general collateral repo rates in the US had risen previously, but have recently fallen. In September and October of this year, the SOFR spread with the reserve rate, the TGCR spread with the reserve rate, and the EFFR spread with the reserve rate (the interest rate the Federal Reserve pays to banks to hold reserves) have risen, reflecting tightened liquidity in the repo market due to factors such as month-end issues and Treasury Department TGA fund supplementation. Similarly, the SOFR-OIS spread has been rising since July, tightening interbank liquidity. However, looking at the SOFR-policy rate spread, while there has been some increase, recent pressure levels are significantly lower than during the repo market liquidity risk event in September 2019. Furthermore, after overcoming end-of-October pressures, several US repo market spread indicators have fallen in November. Previously, pressure in the US repo market also led financial institutions to use the Federal Reserve's liquidity tools more frequently, but since November, the frequency and scale of SRF liquidity tool usage have significantly declined. The repurchase agreement tool (SRF) supports the effective implementation of monetary policy and smooth market operations. The original intention was to provide primary dealers and qualified depository institutions with a channel to exchange high-quality collateral such as treasury bills for short-term funds, thus stabilizing short-term interest rates when there is a liquidity squeeze in the market. In September and October of this year, as reserves transitioned from the "comfortable" range to the "adequate" range and the balance sheet reduction continued, the SRF tool was used more frequently, and the scale continued to rise, reflecting that bank reserves are approaching the "adequate" level and some institutions are facing financing pressure. However, after the end of October, overall SRF usage has actually significantly decreased both in scale and frequency. Overall, current pressure in the US funding market has significantly eased, and liquidity pressure is clearly manageable. If extreme situations similar to September 2019 arise in the funding market, it is expected that the Federal Reserve will use repos and other tools to inject liquidity into the market to alleviate pressure. Currently, in terms of repo volume, the Federal Reserve has limited liquidity injection using this tool recently. If in the future, spreads increase significantly beyond historical highs at non-month-end times or daily movements approach those seen in June 2019, the Federal Reserve may take further measures to inject liquidity. However, there is currently no clear market pressure requiring direct intervention by the Federal Reserve through repos. After the Federal Reserve stops reducing its balance sheet on December 1st, funding market pressures may further ease. After more than three years of balance sheet reduction decisions, the Federal Reserve's monetary policy is entering a new adjustment phase. The Federal Reserve announced at the October rate-setting meeting that it will officially end balance sheet reduction on December 1st, leaving time for the market to digest and buffer against sudden liquidity tightening to avoid volatility. Powell stated at the meeting that after ending balance sheet reduction on December 1st, the proceeds from maturing mortgage-backed securities will be reinvested in short-term treasuries, which will help shorten the weighted average maturity of the Federal Reserve's portfolio, making it closer to the market's outstanding securities. Powell stated that in December, the Federal Reserve will enter the next phase of its asset normalization plan, which involves maintaining the size of its balance sheet relatively stable for a period of time. Risk factors: Unexpected changes in the US economy; unexpected policies from the Trump administration; unexpected changes in US monetary policy; unexpected geopolitical risks, etc.