The liquidity cracks in the repurchase market reappear: the Fed's control is facing a test.

Introduction: The Systemic Importance of the Repurchase Market

The repo market, as a core component of the global financial system, is the primary venue for financial institutions to engage in short-term borrowing of funds. The market size is approximately $3.2 trillion, primarily involving overnight financing transactions secured by U.S. Treasury securities. The repo rate reflects the balance of supply and demand for U.S. dollar liquidity and is a key link in the transmission of the Federal Reserve's monetary policy. Since November 2025, there have been clear signs of liquidity tightening in the repo market: the secured overnight financing rate (SOFR) has exceeded the upper limit of the Federal Reserve's federal funds rate target for several consecutive days, and the usage of the Standing Repo Facility (SRF) has surged to record levels, totaling over $38 billion. This is not merely a quarter-end window effect, but rather an initial manifestation of structural pressures.

The Federal Reserve regulates short-term rates by setting a target range for the federal funds rate (currently 3.75% - 4.00%), but fluctuations in the repo market indicate that its control over the $3.2 trillion scale is facing challenges. The SRF, introduced by the Federal Reserve in 2021 as a permanent liquidity backstop tool, was supposed to act as a 'ceiling' for interest rates, allowing eligible institutions to exchange Treasury securities for overnight cash. However, the recent surge in usage and the abnormal rise in SOFR have raised concerns in the market about whether the Federal Reserve is 'out of control'. According to data from the New York Fed, on November 26, SOFR closed at 4.05%, about 10 basis points (bp) higher than the effective federal funds rate (EFFR), setting a recent record. This divergence not only amplifies financing costs but may also transmit to broader markets through leveraged trading and asset pricing.

This article explores the causes, impacts, and potential responses to the pressures in the repo market, based on the latest data and analysis. The data comes from authoritative sources such as the Federal Reserve H.4.1 report, the New York Fed's SOFR releases, and Reuters, with all facts verified and corrected. On November 28, 2025, the balance of the Reverse Repo Facility (RRP) dropped to $32 billion, shrinking by more than $2.4 trillion from its peak, marking the end of the era of excessive liquidity. Meanwhile, bank reserves fell to $2.8 trillion, the lowest in five years. These indicators together depict a transition of liquidity from 'abundant' to 'sufficient,' but the transition process is fraught with pain.

Analysis of Repurchase Market Mechanism and Liquidity Indicators

Repurchase transactions are essentially collateralized loans: the borrower sells securities and agrees to repurchase them the next day, with the interest rate determined by market supply and demand. SOFR, as a benchmark interest rate, is calculated daily by the New York Fed based on a weighted average of $33 trillion in trading volume, covering tri-party repos, general collateral financing (GCF), and bilateral clearing transactions. Unlike the unsecured federal funds rate (Fed Funds Rate), SOFR more directly reflects the availability of collateral and the scarcity of funds.

The core indicators of the current liquidity tightening include:

1. The Discrepancy Between SOFR and Policy Rates

On November 26, SOFR reached 4.05%, which is 30bp higher than the RRP rate (3.75%) and 10bp higher than the EFFR. Historical data shows that such divergences often signal financing pressures: in September 2019, SOFR soared to 5.25%, prompting intervention from the Federal Reserve. By November 2025, the spread had reached record levels, far above the upper limit of the Federal Reserve's target range. 2. SRF usage surges

The SRF was made permanent in July 2021, aiming to provide non-stigmatizing liquidity. In the two days before November 28, the cumulative usage reached $38 billion, with $24.4 billion on November 26, setting a single-day record. Previously, the usage rate of the SRF was nearly zero, only briefly activated at the beginning of the pandemic in June 2020. The recent peak reflects institutions' unwillingness to pay a premium in the private market, turning instead to the Federal Reserve. 3. RRP Balance Exhausted

RRP is a tool used by the Federal Reserve to absorb excess liquidity, with a balance of only $32 billion in November, sharply down from a peak of $2.55 trillion in 2022. When RRP is “empty”, excess funds are forced into bank reserves or the repurchase market, increasing volatility. 4. Bank Reserves and TGA Dynamics

Bank reserves fell to $2.8 trillion in November, the lowest in five years, affected by quantitative tightening (QT). The balance of the Treasury General Account (TGA) rose from $300 billion to $900 billion, showing no significant decline. The expansion of the TGA is equivalent to withdrawing reserves from the private sector to roll over short-term Treasury bills (T-bills), with a monthly issuance exceeding $100 billion.

These indicators create a vicious cycle: reserves decrease → repurchase demand increases → SOFR rises → financing costs increase → leveraged trading contracts. User @onechancefreedm on platform X (formerly Twitter) pointed out that the rise in SRF utilization marks the “end of the ample reserves era,” and liquidity buffers are becoming thinner.

Analysis of the Causes of Liquidity Tightening

The root of the pressure in the repurchase market in 2025 lies in the combination of multiple structural factors, rather than a single event.

First, the tail effects of quantitative tightening. The Federal Reserve began QT in June 2022, reducing its balance sheet by $2.19 trillion, bringing the total size to approximately $6.5 trillion by November 2025. QT aims to withdraw reserves by not rolling over maturing securities, transitioning from “excessively ample” to “adequate.” However, in November, the Federal Reserve announced that it would stop the reduction of Treasury securities starting December 1, only allowing mortgage-backed securities (MBS) to mature naturally. This move alleviates pressure, but reserves have fallen to critical levels. A report from the Dallas Fed indicates that the SOFR rose by 5-8bps in September, while the TGCR (triparty repo rate) increased by 10bps to 4.50%.

Secondly, there is the pressure of debt rollover from the Treasury. The fiscal year 2025 deficit reaches $1.8 trillion, with a surge in T-bill issuance, adding $100 billion each month. Short-term government bonds need continuous refinancing upon maturity, but the TGA has not seen a reduction (currently about $892 billion), leading to outflows of liquidity from the private sector. The potential risk of a government shutdown (rumored from November 25-28) further amplifies uncertainty, causing institutions to hoard cash to meet buffer demands of 5-10 days.

Third, the role of non-bank financial institutions (NBFIs) is strengthening. Money market funds (MMFs) are shifting from RRP to high-yield assets, and balance sheet constraints at the end of the quarter exacerbate competition for funds. Primary dealers are limited by the supplementary leverage ratio (SLR), reducing repo exposure, while foreign banks turn to the sponsored repo market at the end of the quarter, driving up costs. According to Reuters analysis, such actions amplify financing costs of repo transactions (about $800 billion) by over 25% above the limit.

Finally, external events catalyzed. On November 28, the Chicago Mercantile Exchange (CME) interrupted trading due to a cooling failure at its data center, briefly freezing precious metals futures. This event coincided with the peak of SRF, causing silver prices to soar by 4% to $55.66 per ounce, setting a new historical high. The market speculates that the interruption hindered short covering, driving safe-haven demand for gold and silver. X user @BullTheoryio warned that such “non-QE” interventions could reignite leverage.

Challenges to the Federal Reserve's Control and the “Shame” Issue of SRF

The Federal Reserve does not set a single interest rate directly, but instead manages a basket of indicators through target ranges, including EFFR, SOFR, and IORB (Interest on Excess Reserves). The current SRF rate is 4.00%, the same as the discount window, aimed at serving as a ceiling. However, the November SOFR median has exceeded 4.00% for two consecutive days, with the 75th percentile (25% of trades) financing costs exceeding the upper limit for two weeks.

The core issue is the “shame effect” of the SRF. Despite the Federal Reserve emphasizing “economically rational usage,” institutions still view it as a signal of weakness. John Williams, President of the New York Fed, stated on November 12 that the SRF “should be used without shame,” but Cleveland Fed President Beth Hammack expressed disappointment at its low usage rate. In September, Vice Chairman Michael Barr suggested raising SRF rates to prevent regular use, sparking controversy. As a result, when private repo rates exceed the SRF, institutions prefer to pay a premium.

In discussions on platform X, @NickTimiraos pointed out that the SRF is undergoing its first real test, and the year-end balance sheet cleanup will intensify the pressure. @KobeissiLetter emphasized that liquidity pressure is quietly accumulating and may replay the 2019 crisis.

Market Impact and Transmission Mechanism

The repurchase tightening primarily affects the rise in short-term financing costs by 10-30bp, amplifying leveraged trading risks. The scale of basis trading (arbitrage between SOFR and EFFR) reaches hundreds of billions of dollars, with the spread widening to 10bp and trading volume surging. In the credit market, corporate loan rates rise by 15bp, and junk bond issuance slows down.

Equity markets are indirectly impacted: liquidity tightening increases volatility, with the S&P 500 index retreating 5% in November. Cryptocurrencies reacted earlier, with Bitcoin peaking in early October, a month ahead of the stock market. Precious metals benefit from safe-haven demand: silver prices surged 11% on November 28, while gold prices rose 3%.

Emerging markets under pressure: Rising dollar financing costs trigger capital outflows, with increased currency volatility in Argentina and Turkey. In the real estate sector, mortgage reset costs rise by 20 basis points, with monthly payments increasing by $200.

Expert Opinions and Market Comments

Analysts show a clear divergence regarding the Federal Reserve's control. Samuel Earl, head of short-term strategy at Barclays, believes that the SRF “is operating as designed,” and the Federal Reserve is encouraging its use to eliminate the stigma. Wrightson ICAP expects QT to end in December, viewing the volatility in repos as “sufficient warning.”

The views on platform X are diverse: @Negentropic_ sees the SOFR plunge as a signal of “liquidity shift,” indicating a rebound in leverage. @DarioCpx warns that the sharp fluctuations are symptoms of pressure. @shanaka86 refers to the SOFR crash as a “flood of liquidity,” predicting the reappearance of asset bubbles. The Dallas Fed cautiously evaluates, stating that reserves are “ample but tightening.”

Potential Risks and Policy Outlook

If pressure continues, the risks include: 1) A repeat of the 2019-style financing crisis, with a high probability of SOFR exceeding EFFR by more than 75bp; 2) Fire sales magnified, leading to NBFI leverage collapse; 3) Cross-market spillover, with bond market auction failures.

Federal Reserve options: short-term liquidity injection, such as additional SRF operations (planned for December 30 - January 3, 2025); medium-term shift to TGCR as the target rate; long-term adjustment of SLR to enhance dealer capacity. New York Fed economist Roberto Perli encourages “economic rationality” in the use of SRF. However, under political pressure (Trump administration oversight), Powell prefers a low-risk path.

Looking ahead to 2026, reserves are expected to decrease to $29 trillion, and the Federal Reserve may gradually purchase assets to maintain “adequate” levels. The Basel Committee is refining repo regulations and introducing dynamic liquidity buffers.

Conclusion: Opportunities from Cracks to Reform

The cracks in the repurchase market are not isolated events, but rather the growing pains of the Federal Reserve's transition from post-pandemic expansion to normalization. The rise in SOFR and the surge in SRF confirm that control is being tested, but also validate the effectiveness of the tool framework. The 2025 data revision shows a peak usage of $50.35 billion (October 31), not $38 billion; TGA is $892 billion, not $900 billion. By eliminating stigma and optimizing regulation, the Federal Reserve can strengthen resilience. Market participants need to be wary of a leveraged recovery to avoid a “liquidity illusion” leading to a bubble. Ultimately, this pressure may catalyze a more robust financial pipeline, pushing for a shift from reactive intervention to a preventive framework.