GM. This is Milk Road Macro, the newsletter that spots financial storms before your weather app gets the memo.
Here’s what we got for you today:
- ✍️ Here’s why the TGA rebuild is important
- 🎙️ The Milk Road Show: Macro Trends Poised to Ignite Crypto’s Next Bull Run: Market Radar’s Macro Outlook Explained
- 🍪 Trump issues “tariff letters” to more countries
Prices as of 8:00 AM ET.
HERE’S WHY THE TGA REBUILD IS IMPORTANT
We are set for a short liquidity crunch over the coming weeks.
Due to the signing of President Trump’s “One Big, Beautiful Bill”, we’ll see a “TGA rebuild”.
This will cause hundreds of billions of dollars to be drained from the banking system.
This could affect financial markets.
And could also cause the Federal Reserve to consider stopping its Quantitative Tightening regime.
So, what in the world is this “TGA rebuild” all about - and why is it important?
What might happen next?
And what does it all mean for financial markets?
Let’s take a look…
If you are unfamiliar with the concepts discussed below and would like to learn more, I would recommend reading this newsletter, which should help make things a little more clear.
The TGA rebuild
Over the past six months, we have seen a liquidity injection from the Federal Reserve into financial markets.
This is because the US Government’s debt ceiling became binding on January 1.
The Treasury could no longer issue new, additional debt.
And so it has spent roughly $500bn of its “savings” - a huge pile of cash at the Federal Reserve called the Treasury General Account (TGA).
Money sitting idle in the TGA can be thought of as “removed from markets” and locked away at the Fed.
So, drawing down the TGA is technically a liquidity injection, because “new” cash is flowing from the TGA at the Fed and into markets.
However, last week Trump’s “One Big, Beautiful Bill” was signed into law, and this includes a $5 trillion increase in the debt ceiling.
The debt ceiling constraint has now been lifted, so the Government will be flooding the market with new debt to “refill” the TGA in the coming weeks.
This is a liquidity drain, because money will be flowing from markets back into the TGA at the Fed.
The current “target level” for the TGA is $850bn (it’s possible this could be lowered, but this is the current target level).
Therefore, roughly $500bn needs to be found from somewhere for the TGA refill.
However, there are some “emergency funds” available.
Financial institutions are currently parking $227bn at the Fed’s Reverse Repo facility.
It’s likely that the Treasury will issue a lot of T-bills, which may help to tempt some of this cash out of the Reverse Repo facility (liquidity injection) and soften the negative liquidity effects of the TGA rebuild on a net basis.
But even with these extra “emergency funds”, a minimum of roughly $300bn still needs to be found from elsewhere in the banking system.
This will suck dollar liquidity away from markets.
The TGA rebuild process is likely to take roughly 2 to 3 months to complete.
Why is this important?
The most important aspect of this TGA rebuild process is that it will cause a drop in bank reserves.
Bank reserves are a special kind of money used solely within the banking system.
They are important because they basically underpin the financial system.
Bank reserves are likely to fall below $3 trillion due to the TGA rebuild.
The Fed is always attempting to gauge whether bank reserves are “abundant”, “ample” or “scarce”.
The Fed absolutely doesn’t want bank reserves to dip too far into “scarce” territory.
If this happens, problems can arise deep within the plumbing of the financial system.
The issue with bank reserve scarcity is that “everything is fine” until suddenly “everything is not fine”.
It’s not a sliding scale, it’s like flipping a switch.
In September 2019, the Fed pushed it too far.
Bank reserves fell so low that they caused what is known as the Repo Crisis.
SOFR - Secured Overnight Financing Rate - (a boring but very important dollar funding rate) suddenly “blew out”.
The Repo Crisis caused a widespread meltdown in the plumbing of the financial system, forcing the Fed to immediately switch from Quantitative Tightening to Quantitative Easing to pump more liquidity into markets.
(A lot of people may not know that the Fed had already started “light” Quantitative Easing in September 2019, before the monster QE a few months later when the pandemic began)
Over the past 9 months there have been some small-scale spikes in SOFR (indicating minor funding stress), which is a sort of “warning sign” to the Fed that bank reserves might be approaching scarce levels.
(SOFR should stay below the Fed Funds upper bound if things are “running smoothly”)
What might happen next?
The problem with reserve scarcity is that nobody really knows where the “scarce” level is.
There’s no widely agreed-upon measure, but there are a number of ways to attempt to gauge where it is.
One of those is bank reserves as a percentage of GDP.
Bank reserves as a percentage of GDP will likely dip to multi-year lows below 10% - maybe around 9% to 9.5% - due to the TGA rebuild process.
So, edging further into unknown territory and closer to the elusive “scarce” level.
It’s likely that we will see some more funding stress in the coming months, particularly around the end of September.
You can see on the chart above that the Repo Crisis occurred in 2019 with bank reserves as a percentage of GDP at around 7%.
But the Fed won’t want to get anywhere near this level again.
So I think it may be likely that the Fed will stop its Quantitative Tightening regime at some point before the end of 2025.
QT has already been “tapered” twice, and is now running at only $20bn per month.
So, it’s not a massive stretch for the Fed to just take the final step in stopping altogether, which will halt a lot of the downward pressure on bank reserves.
We’re also seeing some dissents among FOMC members regarding the path of rate cuts, so stopping QT might become part of some kind of compromise among members in the coming months.
A stop to QT would generally be an overall bullish signal for risk asset markets, even though the actual liquidity effects would be minimal, because it’s already been tapered to a very low level.
Speculation about when the Fed might start expanding its balance sheet again would probably then kick into gear.
What does it mean for markets?
The TGA rebuild process is likely to put upward pressure on both the US dollar and US Treasury yields.
The two previous TGA rebuilds have coincided with rises in the Dollar Index (DXY) and the 10-year US Treasury yield (US10Y).
It can be debated whether movements in the TGA directly affect risk asset markets.
If we look at the previous two TGA rebuilds, we see they have largely coincided with negative or flat price action in the S&P 500 and bitcoin.
Wrapping up
The TGA rebuild process will cause bank reserves to contract and move closer to “scarce” levels.
This might cause stress in important dollar funding markets (particularly around the end of September).
The TGA rebuild process may also become a tailwind for the US dollar and US Treasury yields, and potentially a headwind for risk asset prices.
However, the Fed might consider ending its Quantitative Tightening regime, which would be a bullish signal for risk asset prices.
That’s it for this edition - catch you for the next one.
MACRO SIGNALS: STILL WAITING FOR GREEN LIGHT 🧭
Despite the surge in fiscal stimulus, Market Radar’s models say we’re not in “risk-on” territory yet. Yesterday we sat down with Arty and Gamma, founders of Market Radar, to break down what’s shaping the outlook:
- Why a systematic approach beats gut feeling, especially now
- How the Big Beautiful Bill is adding fuel to an already hot economy
- The real impact of tariffs and trade deals, and why markets aren’t panicking
- The standoff between the Trump administration and J Powell over rate cuts
- What data-driven signals say about the next move for altcoins and Bitcoin
If you want a clear, practical look at where we are in the macro cycle and what to watch before making your next move, this episode is packed with insights for investors navigating 2025.
Click to watch the full episode below. 👇
YouTube | Spotify | Apple Podcasts
BITE-SIZED COOKIES FOR THE ROAD 🍪
Nvidia has become the first publicly traded company to surpass a $4 trillion market valuation. The stock price of the AI chipmaker dropped earlier this year on DeepSeek and tariff fears, but has since surged higher.
President Trump has issued more “tariff letters” to countries across the world. The latest wave includes a huge 50% tariff on Brazil, with the current “deadline” for tariff negotiations set for August 1.
FOMC Minutes from the Fed’s June meeting show most members remain worried about inflationary pressures. However, “most participants” anticipated rate cuts would be appropriate later this year.
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