According to CoinDesk, the U.S. banking system is showing signs of liquidity stress, as indicated by the surge in the secured overnight financing rate (SOFR) on Monday. This could potentially impact risky assets like Bitcoin. The SOFR, which reflects the cost for banks to borrow cash collateralized by U.S. Treasury securities overnight, rose to 5.4%, matching the six-year high reached on January 2, as per the Federal Reserve Bank of New York. This increase signifies tighter liquidity and constraints in overnight borrowing, a situation last seen in September 2019.
David Brickell, head of international distribution at Toronto-based crypto platform FRNT Financial, expressed concern over this development. He stated that this could be a short-term worry for the market, hinting at possible funding stress post the second quarter-end. Brickell also drew parallels with the repo funding rate blow-up experienced in 2019, attributing the current situation to the strains of excessive government debt and Treasury bill issuance. He suggested that the Federal Reserve might need to halt the quantitative tightening and restart liquidity injections similar to quantitative easing.
Brickell further commented that the financial system cannot digest this level of debt without Federal Reserve liquidity. He predicted that the Federal Reserve would soon have to expand its balance sheet as the liquidity provider of last resort. If the Federal Reserve renews its liquidity support, it could potentially benefit Bitcoin, similar to the aftermath of the coronavirus-induced crash in March 2020.
Bitcoin has seen a 13% decline in the past 30 days, diverging from Nasdaq's continued rally. Some observers view Bitcoin as a liquidity gauge, and its losses could indicate challenging times ahead for stocks. The SOFR is colliding with the IORB rate, indicating reserve scarcity in the system. If this continues, it could signal the Federal Reserve to halt QT. However, this could also be another false alarm, as seen a few times over the past year.
