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Another very important repo update: the Fed ends QT. We'll look at the US economy, risk markets, the stock market, and Bitcoin in this global macro update.
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Welcome back to the Bitcoin Layer. I'm Nick Batia. Let's start right away with the repo markets. This chart is the SOFR-to-IOER spread. This is the spread between repo rates in the market and the rate that the Fed pays on reserves to banks that hold reserves directly at the Fed. In other words, this is a rate that looks at the difference that a bank can get from lending money into the repo market versus just keeping it risk-free at the Fed.
Here we have a spread of 14 basis points. This is after rates have now re-calibrated, down 25 from our last video. The Fed cut rates by 25 basis points on Wednesday. We're recording this on Friday, October 31st. Happy Bitcoin white paper day to everyone out there.
Now, you see the green line at 3.90. That's down 25 from 4.15 where we were at the beginning of this week. That rate is the rate now that JP Morgan, etc., will get on their reserve balances. Those reserve balances, just under $3 trillion today, will get into the reserve balance itself in just a few moments. The 4.04 is the repo rate that JP Morgan, when they lend their reserves, or more importantly, money market funds, when they dedicate those funds to the repo market, it means they take their short-term cash and they lend it to banks and dealers for those banks and dealers' Treasury inventory, that collateral that they keep on their inventory.
The spread is now at 14 basis points. This is near the highs. It's also above the Fed's ceiling. The Fed cut its corridor from 4.0 to 4.25 to now 3.75 to 4. So, this is still four basis points above the Fed's desired ceiling. This is another example of tightness in the repo market. We'll probably continue to see more tightness when we get the numbers on Monday for what the repo rates were today. We'll get those on Monday morning. That's because October 31st is another calendar event.
Remember that a calendar event means an event in the repo market that will spike repo rates because there will be a tightness because of several reasons. So, calendars are important because they are when balance sheet strikes have to happen, but they're also when Treasuries settle into the market. Treasuries auction throughout the week, and then on the 15th or the 31st, or right around those dates, depending on weekends, we get settlement, which means the cash has to move out of reserves into the TGA on the Fed's balance sheet. And that movement of cash requires settlement and it requires repo cash, and that's why we get tightness in the repo market around these dates. So on Monday, we'll probably see a rate that I would wager will be higher than 14 basis points on this spread.
It's what happens after that we'll have to look at closely. Remember, when the Fed ended QT this week at its meeting, it didn't end it as of right now. It ended it as of the end of November. So, we're still going to have balance sheet runoff in November before they turn the tide and start increasing the size of their balance sheet again.
How do we know the Fed is going to be increasing the quantity of reserves in the system? There are a couple of metrics that we're looking at: Fed reserves as a percentage of commercial banking assets, also Fed reserves as a percentage of GDP. The reason Fed reserves have to be thought of in the context of these other numbers, such as the size of commercial banking assets or the size of US GDP, is that reserves are used for that interbank settlement purpose, and so reserves are going to need to scale at that rate.
Joseph Wang also put out a tweet this morning that mentioned the reserve balances will need to increase as the sheer quantity of SOFR volumes increase and the quantity of T-bills increase in the market. Those are numbers that we'll show you here in a few moments. One thing you can see in both of these charts is that reserves as a percentage of banking assets or GDP are in decline. That decline must be reversed as we get to a point in which the SOFR-to-IOER spread starts to widen. That's what we saw with our first chart. That's what the indicators tell us: the Fed is going to have to reverse course and start increasing reserves.
Here is that reserve balance now below $3 trillion, at about $2.83 trillion. The orange portion of this chart is bank reserves. You can see RRP, the reverse repo facility, no longer a factor. That reserve buffer has disappeared. Now, bank reserves declining while GDP is increasing and commercial banking assets are increasing. It's not a problem until repo spreads tell you it's a problem. And that's what the repo market told us last week. The Fed got the signal. They ended QT as of November 30th. That's when the orange section will stop going down in size. But we do anticipate them having to increase the size of reserves and stopping the decline because even if they stop the decline in reserves, it will still decline as a percentage of GDP and as a percentage of commercial banking assets as those metrics continue to increase. That's the danger for the Fed. That's what they will have to fight back against with an increase in reserves.
This is what people are calling not QE, but "not QEQE" because it will increase the size of the balance sheet just like episodes of QE in the past, but they're not calling it QE because they're going to be doing it mostly in bills. So therefore, not affecting the duration aspect of the equation from a liquidity standpoint, and that's how we think of it. This is liquidity positive because the asset size of the banking system increases here in this "not QEQE" episode. It doesn't matter from a liquidity standpoint that it's bills or notes or bonds because the size will be increasing. Also, we know that if the bill market is supported, the government, the Treasury Department, will be even more willing to issue more bills. Then, if the Fed is taking down some of those bills, commercial banks will be more willing and able to finance those bills. That also creates balance sheet expansion in the system.
Remember that the Fed is not the only creator of dollars. In fact, it is small in comparison to the rest of the commercial banking system. That's where money creation really takes place. So if you motivate the behavior of the banking system to buy bills, take them down, extend credit to the US government, increase the balance sheet size, and then boost global liquidity as we measure it, that is all going to be liquidity positive.
We'll bring our money markets monitor into it. Right now, we're focused on this purple line at $3.1 trillion. This is SOFR volume. So, we've been looking at SOFR rates. That's the rate on $3 trillion of overnight capital. That $3.1 trillion, as it continues to march up, this was the Joseph Wang point from earlier today, that itself necessitates an increase in reserves of the system and an increase in the quantity of bills that the Fed holds on its balance sheet.
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This is the makeup of the Fed's portfolio. The orange portion here are agency mortgage-backed securities. This orange portion will continue to wind down and will be recycled back into Treasury bills. That's one of the announcements from the meeting, something that we talked about on this show over the last couple of weeks, that the Fed will likely continue to run off MBS because it stated that it wants to get out of the market, and in that way, it'll have to buy more bills. So, the orange portion will go down, the green portion will go up. The total will stay flat until they announce something else, which we anticipate. But we'll have to look at the repo market, for example, and see how the repo market calms down after November 30th.
In this chart, we're looking at the Treasuries owned by the Fed. $3.58 trillion is the quantity, but 9.51% is the percentage. And as you can see, it's fallen quite sharply, fallen to levels that are in line with the beginning of the whole quantitative easing process back in the early 2010s. This line must start to flatten out, and then we believe at least flatten out, perhaps increase in the future. But the flattening out of this line is going to be essential for the Fed. That's why they're going to take agency principal and interest payments that they receive, recycle them into bills. They're going to be buying more bills in the market going forward, but yes, we will have to wait for that type of announcement. It will be liquidity positive.
People might be wondering, well, why is Bitcoin going down as the Fed is announcing increases to the balance sheet? It's not always a one-to-one effect, and it doesn't always happen at the timing that the announcement happens. Sometimes it only happens with the flow itself. So, we'll be waiting for that flow as liquidity watchers. Right now, from the banking asset side, it hasn't turned back up. In fact, it's trending down.
Remember to go to thebitcoinlayer.com/subscribe to become a TBL Pro. Gain access to all of our TBL liquidity metrics and our incredible new dashboard where you guys can track all of this stuff yourself.
Shifting gears out of money markets, we're going to talk about the dollar here briefly and US rates. The dollar showing some life here, just below the 100 level on DXY. It's come out of a big bear move that we had during 2025. From a policy perspective, we expect the dollar bear move to persist and continue, but that doesn't mean it's going to be a one-way street. In fact, it's taking a nice consolidation pause that does pose a threat to risk assets if the dollar can pop. So, this is one of the things that we're watching as one of the risks to our TBL liquidity metric.
A quick mention here for the Chinese currency. We can see that the Chinese currency right now showing a little bit of strength. This is the orange line declining. Going up would mean dollar strength. Going down would mean dollar weakness. So, the Chinese want strength. And you can see here that just as President Trump left Asia, came back to the United States excited about the prospect of signatures with Treasury Secretary Scott Bessant from some of the meetings that they had both in Kuala Lumpur, that was between the Treasury Secretary and his counterparts, and then at the military base in South Korea between President Trump and President Xi Jinping. Now, the communications out of that meeting were positive. It was focused around a couple of issues specifically: fentanyl, tariffs, soybeans, rare earth metal export bans. And these few items, the two governments do seem to have an agreement. We might see signatures. I think the most important takeaway as macro analysts is to look at the currency pair and not see any disruption, but actually see a slight strengthening of the Chinese currency. This is a very positive takeaway from a pure markets perspective. It tells me that the Chinese were not dissatisfied leaving South Korea. We all know what the United States president is going to say leaving any international negotiation. He's going to want to pump his own bags in terms of boosting his credibility as a negotiator. That's obvious. So that's not a signal for us. The signal is here in the Chinese currency.
So let's think about the optimism that both governments come away. We talked about the American farmer. Is this a win for the American farmer? And does it boost the political support for the administration's plans, which included motivations to have the Chinese stop buying American soybeans? So, does that get reversed? Is it in time to save the political support from this base? These are all material conversations as we think about the coming capex boom over the next several years, the investment in US domiciled industries that are technology-heavy. So, just a couple days of price action, but I do personally feel that it's material that the Chinese currency has behaved coming out of the Korean and Malaysian meetings.
The US labor market and the US economy. Let's look at JOLTS. This is the survey where we look at job openings, hires, and quits. What do we see from hires? This is the red line. Hires don't have any momentum. We've been talking about a less than stellar job market. A lot of corporate headlines hitting now over layoffs from companies like UPS, Amazon, big bellwether companies that are announcing layoffs now. The higher rate is not showing any excitement. So, there's a weakness to the labor market, and that underpins the Fed's cutting cycle. We've discussed that. Why is the Fed cutting with stocks at all-time highs? Because the labor market isn't great. Jackson Hole meeting, the Fed pivoted away from its inflation targeting to the labor market. That tells us they have to attend to this weakening in hiring.
Peak at the ISM Services headline number at 50 in orange, but the underlying employment sub-index at 47.2, too. Hiring in services is in contraction right now. That is the data. It's been there for several months, actually, and much of 2025. So, the labor market's not great. The US economy doing quite well on an aggregate GDP level. The stock market obviously right near all-time highs, even though there has been some volatility around the edges. So, the US economy, it's really looking at aggregate spending versus the labor market. There's a gap there. US rates are in decline in response to this gap in data where you see some strong and some weak. The US labor market is the determining factor. We believe in lower rates.
For all the TBL liquidity followers, you know, we watch the MOVE Index. This is bond volatility. It continues to sink. There was a brief pop last month. It fell right back down. Volatility very, very low. It's not helping Bitcoin as Bitcoin's price action really struggled once it failed to stay above that 112 to 117 area that we were watching. It has broken down below the 108 to 111 range, and it is looking like it has this resistance. We are watching the mid-90s area, continue to watch that area as essential support for Bitcoin to hold above that. Though, just a little bit more of consolidation. The consolidation has been lengthy. The bull market has also been going quite for some time, and not seeing underlying bare market fundamentals in the Bitcoin price to us is positive. A little bit of higher volatility in Bitcoin itself over the last few weeks. That's interesting to watch, and that's why we're watching that mid-90s level. But we're watching the MOVE Index fall. It's supporting TBL liquidity, which is really supporting the stock market. The correlations between stocks and Bitcoin still remain high, which causes us to be more particular about the reasons behind the weakness of Bitcoin's price action. Shouldn't it be strong if stocks are strong and volatility in the bond market is low? It doesn't always work like that.
Thanks for sticking with us today at the Bitcoin Layer. I'm Nick Batia. We'll catch you guys next time.
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