Plumbing Notes: The Post-QT Era

the Fed's balance sheet "winter" is coming to an end

As market participants try to unravel the cause of an equity market correction, money markets have begun to make much more sense. Upon pricing in the highly unlikely event that the Fed would unleash an ocean of liquidity in December, to the point that conditions were priced to be looser in November, the market now agrees that dollar funding markets should be tighter by year-end. The market has driven the Nov-Dec SOFR-FF ‘25 spread — i.e. the gap between the expected SOFR-FF basis in November and December — back to positive whenever it strays into negative territory. A negative spread made little sense, given it suggested the Fed would initiate a “Hail Mary” and open the floodgates by injecting reserves before next year.

As for the November cash flood, admitting defeat, Conks’ 8bps target for the Nov SOFR-FF basis, i.e., the anticipated gap between SOFR and FF by November month-end, is now out of contention. Among the usual drivers, a reduced trading week paired with expected upward rate pressure from continued UST settlements means SOFR is scheduled to print just within the target range and the Fed’s SRF minimum bid, the cheapest rate to borrow via o/n (overnight) Fed repos, until month-end.