As the deadline for April tax payments approaches, Wall Street experts are warning of potential disturbances in the US funding markets. The influx of tax payments to the government is expected to withdraw significant amounts of money from the banking system, which could lead to a decrease in bank reserves. This year, the impact could be more pronounced due to higher incomes and a strong stock market performance, raising concerns over maintaining funding-market stability.
The situation brings back memories of 2019 when a spike in corporate tax payments, along with other factors, led to a surge in demand for liquidity. This sudden need caused disruptions in overnight lending markets and prompted the Federal Reserve to step in. While the current scenario is not expected to mirror the 2019 crisis exactly, the potential for market disruptions is being closely monitored.
Teresa Ho, JPMorgan Chase & Co.'s head of short-term interest-rates strategy, highlights the importance of monitoring bank reserves. With reserves currently at $3.62 trillion, a forecasted withdrawal of around $400 billion due to tax payments could push reserves to a critically low level, potentially disrupting market stability.
Additionally, the nearing tax deadline has led to a decrease in money-market fund assets. Specifically, assets in government funds have seen a reduction of approximately $10.3 billion, nearly double the outflow observed in the week preceding last year's tax day.
The first signs of stress due to tax-related withdrawals are expected to appear in the Secured Overnight Financing Rate (SOFR), as liquidity tightens and investors rush for cash. This could also lead to increased borrowing activity in the federal funds market.
Despite a year-over-year increase in tax receipts, there's concern that this month's withdrawals could significantly reduce bank reserves. The New York Fed's survey indicates that the comfortable level for reserves is around $3 trillion to $3.1 trillion, a threshold that could be tested soon.
The Federal Reserve is considering slowing down its balance sheet reduction to prevent a repeat of the 2019 liquidity crisis. Last month, Chair Jerome Powell mentioned plans to taper the quantitative tightening process, reflecting concerns over market stability.
While some analysts believe that robust tax receipts could mitigate the need for short-dated debt issuance, thereby easing potential market stress, the overall sentiment remains cautious. The upcoming tax deadline and its impact on liquidity and funding markets are being closely watched, with the hope that previous disruptions will not be repeated.
