TradFi Liquidity Stress Indicator Surges. What Does It Mean for BTC?

• The secured overnight financing rate surged Monday, indicating liquidity stress in the U.S. banking system.
• That's a concern for markets in the short term, according to FRNT Financial's David Brickell.

Signs of liquidity stress are emerging in the U.S. banking market, which may not bode well for risky assets such as bitcoin {{BTC}}.

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

The increase is a sign of tighter liquidity and constraints in overnight borrowing, a market dynamic last observed in September 2019, after which the Federal Reserve injected liquidity into the repo market, where institutions borrow and lend money for short periods by using Treasury securities as collateral.

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

"It is something for the market to worry about in the short term," David Brickell, head of international distribution at Toronto-based crypto platform FRNT Financial, told CoinDesk. "There might be some funding stress hangover post the [second] quarter-end. Yet, It's reminiscent of the repo funding rate blow-up we experienced in 2019, We're starting to see the strains of excessive government debt and Treasury bill issuance."

Brickell added that ultimately, the Fed would need to end the quantitative tightening, or balance sheet contraction, and restart liquidity injections akin to quantitative easing.

"The financial system can't digest this level of debt without Fed liquidity ... Ultimately, the Fed will soon be back in balance sheet expansion mode as the liquidity provider of last resort," Brickel said.

Renewed liquidity support by the Fed could bode well for BTC as it did after the coronavirus-induced crash of March 2020.

Bitcoin has declined by 13% in the past 30 days, decoupling from Nasdaq's continued rally. According to some observers, bitcoin is also a liquidity gauge and its losses suggest tough times ahead for stocks.

the SOFR is slamming into the IORB rate, again.

this is a sign of reserve scarcity in the system. if prolonged, it would be an efficient signal for the Fed to get on the brakes and cut QT altogether. we've seen a few fakeouts over the last year, this may yet be another. pic.twitter.com/xn1nB9DrL7

— Market Radar (@themarketradar) July 3, 2024