The U.S. Treasury's cash replenishment raises concerns about liquidity, Wall Street focuses on liquidity pressure in September.

With the U.S. Department of Treasury increasing issuance of Treasury bills to rebuild cash reserves, market participants are increasingly concerned about signs of potential liquidity constraints in the financing market. Since Congress raised the debt ceiling last month, the Treasury has issued approximately $328 billion of Treasury bills to supplement its cash balance. This has drained funds from the financial system, making the market more vulnerable to unexpected events. The latest data from the Federal Reserve shows that bank reserves remain at a comfortable level of about $3.33 trillion, providing necessary cushioning for the financing market. However, Wrightson ICAP indicates that this situation may change in the second half of September, when the Treasury's general account is expected to reach $860 billion, higher than the current level of about $490 billion. This increase is primarily due to continued Treasury bill issuance and corporate quarterly tax payments due in mid-month. At that time, bank reserves are expected to drop below $3 trillion for the first time since the onset of the COVID-19 pandemic. "The supply of reserves is about to enter a range where day-to-day fluctuations in the overnight funding market will require closer attention, especially after Labor Day," wrote Wrightson ICAP senior economist Lou Crandall in a report to clients on Monday. "We believe that the decline in reserve supply will not have an immediate impact on the overnight funding market until the total amount of reserves at the Federal Reserve falls below $2.8 trillion."