๐ง ๐๐๐ ๐๐๐ง๐ ๐๐ฉ ๐๐ก๐ช๐ข๐๐๐ฃ๐ ๐๐ฎ๐จ๐ฉ๐๐ข: ๐๐๐ฆ๐ช๐๐๐๐ฉ๐ฎ ๐๐ฃ ๐ฉ๐๐ ๐๐๐ฃ๐๐ฃ๐๐๐๐ก ๐๐ฎ๐จ๐ฉ๐๐ข ๐ฆ
Understanding liquidity is essential for every investor. The economic system is comparable to a global plumbing system, where liquidity is the "lifeblood" ๐: if flows are abundant, markets thrive; if the flow is restricted, tensions emerge.
Liquidity management is divided into three levels: macro, wholesale, and global.
๐ญ. ๐๐๐ ๐๐๐ฟ ๐๐๐๐๐๐ฟ๐๐๐ ๐บ๐ธ
Net liquidity in the financial system is primarily determined by the operations of the Federal Reserve (FED). Flows are influenced by three main tools:
โข ๐๐๐ ๐๐ข๐ญ๐ข๐ฏ๐ค๐ฆ ๐๐ฉ๐ฆ๐ฆ๐ต (๐๐ด๐ด๐ฆ๐ต๐ด):
o ๐๐ฏ๐ซ๐ฆ๐ค๐ต๐ช๐ฐ๐ฏ (Quantitative Easing - QE): The FED buys securities, injecting liquidity into the system. ๐
o ๐๐ณ๐ข๐ช๐ฏ๐ข๐จ๐ฆ (Quantitative Tightening - QT): The FED sells securities or allows maturing ones to expire, draining liquidity and reducing reserves. ๐
โข ๐๐ณ๐ฆ๐ข๐ด๐ถ๐ณ๐บ ๐๐ฆ๐ฏ๐ฆ๐ณ๐ข๐ญ ๐๐ค๐ค๐ฐ๐ถ๐ฏ๐ต (๐๐๐): The checking account of the U.S. Treasury at the FED.
o ๐๐ณ๐ข๐ช๐ฏ๐ข๐จ๐ฆWhen the Treasury raises funds (e.g., taxes or debt issuance) and deposits them in the TGA, it drains liquidity from the market.
o ๐๐ฏ๐ซ๐ฆ๐ค๐ต๐ช๐ฐ๐ฏ: When the Treasury spends the funds, releasing liquidity.
โข ๐๐ฆ๐ท๐ฆ๐ณ๐ด๐ฆ ๐๐ฆ๐ฑ๐ฐ ๐๐ข๐ค๐ช๐ญ๐ช๐ต๐บ (๐๐ ๐๐๐): A tool used by money market funds to park excess liquidity at the FED, temporarily removing those funds from circulation. ๐ ฟ๏ธ
๐ฎ. ๐๐๐ค๐ก๐๐จ๐๐ก๐ ๐๐๐ฆ๐ช๐๐๐๐ฉ๐ฎ
It is not enough to measure total liquidity; it is also necessary to evaluate the cash actively circulating among banks.
๐. ๐๐ข๐ฏ๐ฌ ๐๐ฆ๐ด๐ฆ๐ณ๐ท๐ฆ๐ด ๐ฐ
Bank Reserves are the deposits that commercial banks hold at the FED. They represent the wholesale liquidity that feeds the interbank market and loans to the economy:
โข Abundant Reserves: Banks have wide margins to grant loans. โ
โข Declining Reserves: Tensions may arise in the interbank lending market. ๐จ
๐. ๐๐ฉ๐ฆ ๐๐๐๐-๐๐๐๐ ๐๐ฑ๐ณ๐ฆ๐ข๐ฅ ๐
The SOFR-IORB Spread measures the difference between:
โข SOFR (Secured Overnight Financing Rate): The benchmark interest rate for overnight loans secured by Treasury securities (the real cost of cash in the market).
โข IORB (Interest On Reserve Balances): The rate paid by the FED to banks on reserves, which acts as a floor rate.
In normal conditions, the spread is negative or close to zero. The condition of tension occurs when the spread turns positive and widens.
๐ฏ. ๐๐๐ฉ๐๐๐ก ๐๐ฃ๐ ๐๐ก๐ค๐๐๐ก ๐๐๐ฆ๐ช๐๐๐๐ฉ๐ฎ ๐
Finally, liquidity extends beyond the interbank markets:
โข Retail Liquidity (M2): Represents the broader money supply (cash, demand deposits of households and businesses). A decrease indicates a slowdown that negatively influences economic activity. ๐
โข Aggregate Global Liquidity (Global M2): The sum of liquidity from the main economic areas USA, Eurozone, China, etc.). Expansions or contractions in a large economy ripple through the global financial system, affecting all assets. ๐
Monitoring all these elements allows us to understand whether we are facing a market that is exhausted or primed to push towards new highs.
Thank you!
$EURUSD$SPX500$NSDQ100$GOLD... Show More
Great breakdown, liquidity is the systemโs pulse. I track it too, but prefer to let price trends speak first since they already reflect changing liquidity conditions. Always good to know whatโs behind the flow, but the chart usually tells the story first. ๐๐... Show More
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