If 2021 was a year of liquidity floods then 2024 has already started as a year of liquidity droughts. The biggest indicator of this would be the Secured Overnight Financing Rate (SOFR) which has already witnessed two sudden spikes within the last two months.
SOFR is taken as the proxy of liquidity present in the financial system. Thus, any spikes in these rates mean that the system liquidity is on the verge of drying up quickly.
This would be further verified by the Federal Reserve balance sheet which continues to reduce its assets at a quick rate. Wishing past three months asset size has reduced by $300Bn. This has been accompanied by a reduction of almost $900Bn in reverse repo reserves.
The only liquidity support that continues to grow is the BTFP usage which increased from $112Bn to $161 in the last two months. But the problem with this is that the program expires on 11th March and higher usage towards the end might indicate an underlying stress.
Thus, it becomes more important for investors and other stakeholders to pause and look at signs of distress in this and next quarter. Given that many commercial real estate loans are due to mature in the same period it would be hasty to assume back to normal theory.
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