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Introduction: Signal of sudden tightening in money market
On October 31, 2025, before Halloween, the U.S. currency market experienced significant turmoil.Usage of the Federal Reserve’s Standing Repo Facility (SRF) hit a record high, reaching $50.35 billion, far exceeding levels seen in previous weeks.This incident is not caused by seasonal fluctuations, but is a sign of a sharp escalation of liquidity pressures in money markets.As the core channel for wholesale financing, the repo market has seen interest rate fluctuations and surges in the use of facilities, raising concerns about the stability of the overall financial system.
Currency markets have shown signs of tightening since mid-September.On September 15, the Tricolor incident exposed potential risks in the private credit sector, and the subsequent quarter-end liquidity window effect intensified pressure.Entering October, repurchase demand continued to rise after mid-term. After the Federal Reserve meeting on October 29, the market calmed down briefly, but it erupted again on October 31.During repurchase operations in the morning, U.S. Treasury collateral was borrowed at US$4.4 billion, and mortgage-backed securities (MBS) were borrowed at nearly US$16 billion; this surged further in the afternoon, with Treasury collateral reaching US$25 billion and MBS borrowing an additional US$5 billion, for a total of more than US$50 billion.The scale exceeds the Fed’s previous “technical fluctuations” expectations and is similar to the repo crisis in September 2019, when a shortage of market liquidity forced the Fed to intervene urgently.
Currently, the Fed’s federal funds rate target range is 3.75%-4.00%, which was lowered by 25 basis points on October 29.However, the Secured Overnight Financing Rate (SOFR) recorded 4.04% on October 30, and the 30-day average was 4.20185%, slightly higher than the mid-range value, showing the spillover of repo market pressure to other short-term financing channels.This phenomenon is not isolated, but is the result of the accumulation of risk aversion in the process of quantitative tightening (QT).The Federal Reserve has announced that it will terminate QT on December 1 and end the reduction of its balance sheet ahead of schedule.But the market questions whether this adjustment is enough to resolve the potential crisis.
This article will review the events of 2019, analyze current data, explore shadow banking and private credit risks, and assess the potential impact on the macroeconomy.Through these layers, the systemic challenges behind the tightening of money markets are revealed.
Historical Review: Lessons from the 2019 Repo Market Crisis
On September 17, 2019, a liquidity crisis occurred in the U.S. repo market. The overnight repo rate soared to 10% that day, far exceeding the federal funds rate ceiling of 5.25%.At that time, the Fed’s balance sheet had shrunk from a peak of US$4.5 trillion to approximately US$3.8 trillion. The QT process had caused bank reserves to drop to US$1.4 trillion, and the shift in liquidity from an “abundant” to an “adequate” framework caused market friction.
The root cause of the crisis lies in the superposition of multiple factors: quarter-end regulatory requirements prompting banks to “window dressing” to reduce leverage exposure; corporate tax season peak demand for cash; and risk aversion caused by global trade frictions, leading to the return of overseas U.S. dollar funds.The shadow banking system has amplified the pressure. Non-bank financial institutions (such as money market funds) hold large amounts of government bonds, but are unable to effectively raise funds due to the interruption of the collateral reuse chain.
The Federal Reserve responded quickly: it launched temporary repurchase operations on September 17, injecting hundreds of billions of dollars of liquidity into the market; it expanded asset purchases in October and restarted balance sheet expansion.The crisis lasted until the end of the year, with the total scale of intervention exceeding US$500 billion.Afterwards, the Federal Reserve introduced the Standing Repo Facility (SRF) and the Reverse Repo Facility (RRP) to provide a permanent liquidity buffer.In addition, the reserve framework was adjusted from “abundant reserves” to “sufficient reserves”, and the target reserve level was set at US$1.4 trillion-1.6 trillion.
This incident exposed the fragility of the modern financial system: the repo market exceeds US$4 trillion, accounting for more than 70% of short-term financing, but is highly dependent on a few large banks (such as JPMorgan Chase and Goldman Sachs).Although the 2019 crisis did not trigger a recession, it accelerated the Federal Reserve’s shift to easing policies and paved the way for epidemic stimulus in 2020.The current 2025 scenario is highly similar: QT leads to declining reserves, emerging shadow banking risks, and global economic uncertainty.
Current money market data: Signs of tightening escalate sharply
In October 2025, repurchase facility usage increased exponentially.In mid-September, average daily borrowing was less than $1 billion, largely due to seasonal bottlenecks.In early October, the quarter-end effect pushed up to US$2 billion, but stabilized in the range of US$700-1 billion after mid-term.On October 29, usage rose to approximately $10 billion after the Fed meeting.However, there was explosive growth on October 31: Treasury bond repurchases were US$4.4 billion and MBS US$15.9 billion in the morning; Treasury bonds were repurchased US$25 billion and MBS US$5 billion in the afternoon, totaling US$50.35 billion, setting a record since the launch of SRF in 2021.
This surge is not due to a month-end effect.Month-end is not a critical time in currency markets, unlike quarter-end, which involves regulatory reporting.Data show that the balance of the reverse repurchase agreement (RRP) reached US$51.8 billion on October 31, an increase from the previous day, indicating that the money market fund (MMF) capacity to absorb liquidity is saturated.At the same time, the Triparty Repo General Collateral Rate (TGCR) was on average 8-9 basis points lower than the IORB (Interest Rate on Reserve Balances) in the first eight months of October, but turned slightly higher in September-October, indicating rising financing costs.
As the benchmark for the repo market, SOFR had a clear trend in October: 4.31% on October 2, and then fell back to 4.04% on October 30.The 30-day average SOFR rose from 4.19115% at the beginning of October to 4.20185% at the end of October, which is higher than the median effective federal funds rate (EFFR) (about 3.875%).The calculation of EFFR will not be released until Monday, but it is initially estimated that it will be 4.00% higher than the upper limit on October 31, continuing the fluctuation pattern since September.In September, SOFR once exceeded the upper limit by 4 basis points. Although it fell back in October, the weekend effect may amplify the pressure.
Bank reserve levels are another focus: they averaged US$3.2 trillion in the first half of 2025, falling to US$2.8 trillion in October, which was twice the peak in 2019.QT has reduced assets by US$1.5 trillion since its launch in 2022, but the reserve/GDP ratio is still 10-11%, well above the “adequate” threshold.These data suggest that the tightening is not caused by an absolute shortage of reserves, but by uneven distribution and rising risk premiums.
Fed response: Early termination of QT and policy adjustments
The Fed’s response to current tightening is similar to 2019.In the statement of the FOMC meeting on October 29, the committee decided to end QT on December 1 and the total number of securities holdings will not be reduced.Chairman Powell acknowledged at the press conference that recent market pressures have accelerated this timeline, similar to the shift from “unplanned end” to “emergency intervention” in 2019.The Fed lowered the QT cap from $60 billion per month to $30 billion (mid-2024), but volatility in October prompted further tightening.
Under the policy framework, the Fed does not directly target the repo rate, but uses EFFR as the anchor.However, SOFR covers 98% of domestic repo transactions and is more representative, and its fluctuations have spilled over to the federal funds market.Powell emphasized that this is a normal fluctuation in the transition from “ample reserves” to “ample reserves”, accompanied by seasonal and regulatory factors.However, market data shows that TGCR was higher than IORB in October, indicating that financing pressure exceeded expectations.
The SRF was designed to smooth out volatility, offering unlimited borrowing ($500 billion per day), but a surge in usage on October 31 showed its limited buffering effect.The Fed may discuss additional measures at its November meeting, such as restarting asset purchases or adjusting reserve targets.Analysts expect that the end of QT will release approximately US$200 billion in liquidity, but if shadow risks persist, more radical intervention may be needed.
Potential reasons: Risk aversion and hidden dangers of shadow banking
The core of the money market tightening is not the Fed’s policy mistakes, but the amplification of market participants’ risk aversion.The August non-farm payrolls report showed a slowdown in the labor market, with the unemployment rate rising to 4.2% and an increase in layoffs among small and medium-sized enterprises.This confirms the downturn in the real economy and affects the quality of private credit portfolios.The private credit market reaches US$2 trillion and will grow by 20% in 2025, but valuation bubbles and fraud risks are prominent.
Shadow banks (non-bank financial intermediaries) are amplifiers of austerity.JPMorgan Chase CEO Dimon recently warned of “cockroaches”, pointing to hidden risks.Case in point includes the collapse of Tricolor: the private credit provider defaulted in September, exposing overexposure to risky auto loans.First Brands followed suit and had its credit rating downgraded in October, causing a loss of US$200 million.These events have led to doubts about collateral valuations, with money market participants (such as MMFs) reducing repo deployments, even when backed by Treasury securities.
Information asymmetry exacerbates the problem.Bank of England Governor Bailey said in mid-October that he received a “nothing to worry” response when asking private credit sponsors, but it was difficult for regulators to verify it.International Monetary Fund (IMF) Managing Director Kristalina Georgieva has warned that private credit risks “keep her awake at night” as banks’ share of loans to her rises to 20%.The total scale of shadow banking is US$3 trillion, showing “bubble characteristics” and lack of transparency, which may trigger a global impact.
The appreciation of the U.S. dollar exchange rate further pushed up the interest rate gap between China and the United States, and the return of overseas funds reduced global liquidity supply.The U.S. dollar index rose 3% in October, corresponding to SOFR fluctuations.These factors combine to create a “cockroach effect”: risks emerge from the shadows, forcing cash holders to turn to Fed facilities.
Similarity to 2019: Pattern Repeats and Differences
The scenario in 2025 is highly overlapped with that in 2019.First of all, the QT background is similar: both occurred during the period of reserve decline, with reserves of 1.4 trillion in 2019 vs. 2.8 trillion in 2025, but the relative tightening effects are equivalent.Secondly, the triggering events are similar: trade war and yield curve inversion in 2019, employment slowdown and private credit defaults in 2025.The yield curve inverted in October, indicating the risk of recession.
The difference lies in tool maturity: SRF has been operational since 2021, but the usage rate on October 31 shows that it has not completely resolved structural frictions.In addition, the proportion of private credit will be higher in 2025 (shadow banking/GDP 15% vs. 10% in 2019), and risks will be more systematic.The Fed’s policy is also more cautious: emergency expansion in 2019 and gradual response through QT in 2025.
Macro Impact: From Short-Term Volatility to Systemic Risk
In the short term, tightening will push up financing costs and affect corporate borrowing.The interest rate on loans to small and medium-sized enterprises has risen by 25 basis points, inhibiting investment.Although the stock market did not experience a severe shock (the S&P 500 rose 2% in October), bond spreads widened and the credit risk premium rose to 150 basis points.
In the long term, if not resolved, it may trigger a chain reaction: shadow banking defaults will spread to bank balance sheets, amplifying the credit crunch.Although the crisis in 2019 was short-lived, it contributed to a drag on GDP of 0.5%.In 2025, private credit exposure may result in losses of US$1-2 trillion, similar to the embryonic subprime mortgage crisis in 2008.The global impact is significant: the European Central Bank has monitored the US dollar financing pressure and may need to coordinate intervention.
Outlook: Policy shifts and risk monitoring in November
In the first week of November, EFFR and SOFR data will reveal the weekend effect.If SOFR exceeds the upper limit by 5 basis points, the Fed may accelerate the end of QT or initiate temporary operations.Market pricing shows that the probability of the federal funds rate at the end of 2025 is 3.71%, implying further interest rate cuts.
Investors should pay attention to shadow banking supervision: the Federal Reserve and SEC may strengthen disclosure requirements to alleviate information asymmetry.Monitoring the real economy is crucial, and employment and consumption data will determine whether the tightening spreads.Overall, current events are a reminder of the interconnectedness of the financial system: money markets, although invisible, underpin global liquidity.Early intervention can avoid a repeat of 2019, but we need to be wary of systemic surprises brought by private credit “cockroaches”.
