The truth is, yes — there are pressures building in the financial system. But no, this isn’t the start of another liquidity crisis. In fact, it’s probably the opposite.
Liquidity Is Quietly Returning
The Federal Reserve officially ended quantitative tightening last week, and that’s not a small thing. QT ending means fewer assets being drained from the system, and liquidity — the lifeblood of markets — starting to circulate again.
On top of that, the Fed has already begun cutting rates, with a 65% probability priced in for another rate cut in December.
So while the financial press is panicking about repo spikes and balance sheet stress, the more important signal is that the Fed has already blinked.
As of now, the issues in the repo market appear to be manageable — if not dissipating.
This isn’t a liquidity hole. It’s a transition.
Regime Change at the Fed
It’s becoming increasingly clear that we’re entering a structural regime shift at the Federal Reserve.
If the current trajectory continues — and political pressure mounts from the incoming Trump administration — the Fed may have little choice but to move further toward looser monetary policy.
In plain English: if Powell and his team don’t play along, they’ll be replaced by someone who will.
The playbook is simple — cut rates, boost liquidity, and keep markets stable at all costs.
It’s the same old story: politics bends economics until it breaks.
As Keynes once said, “Markets can stay irrational longer than you can stay solvent.”
But what happens when the central banks themselves become irrational?
Short Term Bonds Are Speaking Loudly
Here’s what really stands out:
Short term bonds $SHY are falling alongside long term bonds $TLT. Market participants are not getting in line with the Feds plan to lower rates.
Normally, you’d expect short term yields to move lower while long term yields stabilize or as the market starts anticipating recovery.
But this time, both ends of the curve are under pressure.
That means the bond market isn’t just pricing in lower rates — it’s questioning why those rates are being cut.
Are these cuts preemptive? Or reactive? If inflation remains sticky — or reignites — the Fed could find itself trapped again.
They would have to pivot from lowering rates to leaving rates unchanged and possibly even raising rates in the future.
Inflation Isn’t Dead — It’s Dormant
Let’s be honest.
The narrative that “inflation is dead” has been one of the biggest myths of this cycle. Inflation has continued to rise this year, even as policymakers and pundits keep insisting it’s over.
And that’s without oil or gasoline moving higher — yet.
At some point, one of these rate cuts — maybe the last one, maybe the next — could reignite inflation in a way the Fed can’t easily control.
This is the paradox of easing into rising prices: you can’t fix the cost of capital while pretending energy and wage growth don’t exist.
The Yield Curve: The Real Compass
If you want to know where the next big macro move is headed — watch the yield curve.
As long as the curve keeps steepening (meaning long-term rates rise faster than short-term rates), the U.S. dollar will continue to weaken structurally.
We’ll see bounces and countertrend rallies — that’s normal — but the longer term trend is clear.
A steepening curve + growing global economy + Fed easing = weaker dollar.
This is exactly what we’ve seen in every major cycle shift — 1990, 2003, 2010, 2020. Each time, the curve turned up before the dollar rolled over. It’s a slow process, but once it starts, the macro tide turns for years.
If the dollar manages to close a week above 101.21, that would be the line in the sand — a sign that the bounce might be turning into something bigger. Until then, the path of least resistance is lower.
Chart Context: Yield Curve Steepening, Dollar Softening
The chart above shows the U.S. Dollar Index $DXY on the top and the 3-Month vs 10-Year Yield Curve on the bottom. Notice how every period of yield curve inversion and subsequent steepening has coincided with a weakening dollar. It’s not just correlation — it’s cause and effect.
Liquidity comes back → yield curve steepens → dollar weakens → global risk assets catch a bid.
That’s exactly where we are right now.
What the Repo Headlines Missed
The repo headlines grabbed attention because they sound systemic — “banks tapping the Fed,” “record numbers,” “month end stress.” But this is just part of the plumbing of the modern financial system.
In reality, banks tapping the Fed’s Standing Repo Facility is the equivalent of topping off your tank before a road trip.
It’s a sign of preparation, not panic.
With QT ending, balance sheets are loosening up, not tightening. The liquidity that left the system in 2022–2023 is now quietly finding its way back in. And that’s why you’re starting to see pressure building beneath risk assets again.
The Big Picture
Liquidity is improving. The Fed is cutting. Inflation is still alive. And the dollar is on the verge of a long term downtrend.
This is not the time to panic about bond stress. It’s the time to pay attention to what kind of easing we’re stepping into.
If the Fed cuts too early, they risk repeating the 1970s — the “stop go” inflation era, when each rate cut reaccelerated prices. If they cut too late, they risk breaking credit again.
That’s the tightrope they’re walking now. And as traders, we don’t need to predict which way they’ll fall — we just need to recognize that volatility is the signal.
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