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Stocks sold off sharply on Friday morning but recovered throughout the day. The VIX fell hard all afternoon, which led me to believe that what we were seeing on Friday were put positions being closed ahead of the weekend, on the risk that the government shutdown might be resolved. The VIX peaked around noon at 22.7 and fell throughout the afternoon, finishing the day at 19.
However, the VIX 1-Day closed at 16.9, which is still somewhat elevated, so it wouldn’t be surprising to see the rally continue on Monday, at least through the first part of the day.
That said, Wednesday and Thursday will be Treasury settlement dates, with $14 billion and $23 billion settling, respectively. That should bring some of those overnight funding pressures we have witnessed in recent weeks. Although I doubt it will be nearly as bad as what was seen at the end of October.
Anyway, there is a lot of misinformation on social media about SOFR “dropping like a stone” and fiscal QE being built up in the TGA. It’s all BS. SOFR did drop—as it should—because the Fed cut rates by 25 bps. But remember: what determines whether SOFR is tight or easy is the spread at which it trades relative to instruments like the effective fed funds rate or the Interest on Reserve Balances (IORB). By that measure, SOFR is still trading above those instruments, suggesting that pressures have eased but remain tight.
In the meantime, the TGA is targeting a year-end total of around $850 billion, and, as a rule of thumb, the Treasury typically likes to keep at least one week’s worth of liquidity in the account. With the TGA currently at about $950 billion, there’s roughly $100 billion too much sitting in it. This means that when the government reopens, we’ll likely see the TGA fall by about $100-$200 billion. However, if it drops below $850 billion, the Treasury will likely refill it to that level. So, by that measure, there isn’t a massive amount of fiscal QE entering the system. The TGA shouldn’t drop back to the near-zero levels seen during the debt ceiling period—and if it does, it will just be replenished, as per the Treasury’s latest Quarterly Refunding Announcement, last week.
-Mike
Glossary by ChatGPT
Fiscal QE – A misused term referring to Treasury-driven liquidity effects, distinct from Federal Reserve quantitative easing.
Interest on Reserve Balances (IORB) – The rate the Federal Reserve pays banks on reserves held at the Fed, influencing short-term interest rates.
SOFR (Secured Overnight Financing Rate) – A benchmark interest rate for overnight loans secured by U.S. Treasury securities, reflecting funding market conditions.
TGA (Treasury General Account) – The U.S. Treasury’s account at the Federal Reserve used to manage government cash flows.
Treasury Settlement Dates – Days when investors pay for recently auctioned Treasury securities, which can temporarily impact liquidity.
VIX (CBOE Volatility Index) – A measure of expected near-term volatility in U.S. equity markets derived from S&P 500 option prices.
VIX 1-Day – A version of the VIX that measures expected volatility over a single trading day rather than the standard 30-day period.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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