Investors Expect Relief in Money Markets as Fed Resumes T-Bill Purchases
By Reuters
|Dec. 10, 2025, at 6:02 p.m.
By Davide Barbuscia
NEW YORK, Dec 10 (Reuters) - The Federal Reserve’s move to ?expand ?its balance sheet again by buying Treasury ?bills is expected to ease money-market strains, calming investor worries that years of bond-portfolio runoff had ?drained too much liquidity from the financial system.
The Fed said on Wednesday it would start buying short-dated government bonds to help manage market liquidity ?levels to ensure the central bank retains ?firm control over its interest rate target system. The purchases will begin on December 12 with an initial round that will total ?around $40 billion in ?Treasury bills, it said.
The move is likely to ease upward pressure on borrowing rates in the roughly $4 trillion U.S. overnight repurchase agreements (repo) market, where banks and hedge funds exchange short-term loans backed by collateral such as U.S. Treasuries and other securities.
Those rates have surged several times over the past few weeks, even after the Fed announced its intention to halt the reduction of ?its bond holdings - an operation known as quantitative tightening.
Higher repo rates - as indicated by the Secured Overnight Financing Rate (SOFR) - reflect tighter ?liquidity, pushing ?lenders to charge a premium ?on repo transactions.
"I think ?it's a positive development in that over time, you do need to have the Fed in an expanding balance sheet position," said Robert Tipp, chief investment strategist at PGIM Fixed Income.
"It's important to have people doing arbitrage between Treasuries and futures to keep the market sufficiently liquid, and this provides a good backdrop for that," he added, referring to investors who buy Treasuries via debt raised in the repo market for so-called basis trades that profit from the price difference between Treasuries and Treasury futures.
The tightening in money market liquidity earlier this year was due to a ?combination of factors, including a surge in U.S. Treasury bill issuance in recent months, as well as the U.S. government shutdown, which meant the Treasury accumulated funds in its account at the Fed due to a reduction in government payments of salaries and other expenses, analysts have said.
Generally, a higher Treasury General Account (TGA) drains reserves from the banking system, meaning banks have less money to lend.
The Fed this month ended quantitative tightening but the decision, announced in October, did little to ease concerns about near-term liquidity strains in the repo market, where borrowing rates have remained stubbornly high in recent weeks, sometimes higher than the Fed policy rate.
Many analysts had anticipated a pivot back to asset purchases, though most expected it early next year. The Fed’s decision to resume expanding its holdings now appears aimed at ?shoring up liquidity ahead of year-end, a period that often brings sharp but short-lived money-market volatility.
"The reason they made it now is that pressure in the repo market, with repo trading above the administered rates, continued into early December, even after QT was formally concluded on December 1," said Stephen Douglass, chief economist of NISA Investment Advisors.
"This is ?good, it does remove the risk of funding pressure, or some kind of repo dysfunction," he said.
Investors Expect Relief in Money Markets as Fed Resumes T-Bill Purchases |
