TradFi liquidity stress indicator increases. What does this mean for BTC?

The overnight secured funding rate rose on Monday, a sign of liquidity stress in the US banking system.

Signs of liquidity stress are emerging in the US banking market, which may not bode well for risk assets like bitcoin (BTC).

On Monday, the secured overnight financing rate (SOFR), which shows how much it costs banks to borrow cash secured by overnight U.S. Treasury securities, rose to 5.4%, matching a six-year high. years reached January 2, according to the Federal Reserve Bank of New York.

The increase is a sign of tighter liquidity and restrictions on overnight lending, a market dynamic last seen in September 2019, after which the Federal Reserve injected liquidity into the repo market, where Institutions borrow and lend money for short periods using Treasury securities as collateral.

Some observers believe the latest SOFR rally is likely to taper in the coming days. For now, however, it could weigh on markets.

“It's something the market needs to worry about in the short term,” David Brickell, director of international distribution at Toronto-based cryptocurrency platform FRNT Financial, told CoinDesk. "There may be some financial stress hangover after the end of the [second] quarter. However, it is reminiscent of the repo funding rate surge we experienced in 2019. We are starting to see the strains of excessive government debt and issuance of Treasury bills".

Brickell added that the Fed would ultimately have to end quantitative tightening, or balance sheet shrinking, and restart liquidity injections similar to quantitative easing.

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