Stocks like MicroStrategy and Tesla are starting to trade as if they have sniffed out an upcoming liquidity bazooka. While it remains to be seen, markets have clearly been front-loading such bets in recent years as liquidity analysis has become democratized. Is a liquidity bonanza actually upcoming? Let’s have a look.

Back in January this year, Lorie Logan of the FOMC said, “… given the rapid decline of the ON RRP, I think it’s appropriate to consider the parameters that will guide a decision to slow the runoff of our assets. In my view, we should slow the pace of runoff as ON RRP balances approach a low level.” Only a few months later, the Fed announced plans to slow QT.

What’s the natural next step once the ON RRP gets close to fully depleted levels? As we made new cycle lows this week based on the humongous pace of issuance from the US Treasury, money market funds have pulled more funds from the ON RRP facility to park in T-bills (net liquidity adding). However, we are approaching some sort of natural floor if these money market funds want to ensure that the Fed does not limit the lines of the facility, as they did with the repo facility (not the reverse repo) a few years back.

This leaves a very decent risk/reward for the Fed, from a risk management perspective, in starting to consider an even earlier end to QT than already discussed, as the natural “buffer” from the ON RRP facility is now close to being fully depleted.

Chart 1: ON RRP hitting new lows, adding liquidity to markets along the way