Fed's Liquidity Injection

✨The last night of 2025 was, as always, a tense turning point for financial markets. Year-end balance sheet adjustments, regulatory pressures, and seasonal liquidity demands pushed banks to seek short-term funding, forcing the US Federal Reserve (Fed) to intervene and inject a record amount of liquidity to prevent a potential market shutdown. On December 31, 2025, the $74.6 billion in overnight funding provided through the New York Fed's Standing Repo Facility was recorded as one of the largest interventions in the post-pandemic era. However, the detail that truly drew attention and sent shivers down the markets lay in the collateral structure behind this massive injection: Banks had prioritized Mortgage-Backed Securities (MBS), known for their risky histories, over traditionally safer Treasury bonds. This evoked the ghosts of the 2008 crisis, once again exposing the vulnerabilities of the system.
⚡ $74.6 Billion Intervention Preventing Market Lockdown and Warning Signs in Collateral Structure

The Federal Reserve (Fed) injected $74.6 billion in liquidity into the market through overnight repo operations on December 31, 2025, to prevent a potential financial market lockdown. This intervention was carried out through the Fed's New York Branch Standing Repo Facility and aimed to alleviate pressure created by year-end operations.
⚡ This amount was recorded as one of the highest levels seen since the COVID-19 pandemic and indicates that banks are turning to the Fed to meet their short-term funding needs.

✨ Details of the Intervention
This Fed operation allowed banks to receive cash in return for offering their securities as collateral. The distribution of the total $74.6 billion in liquidity was as follows:
⚡Mortgage-Backed Securities (MBS): $43.1 billion
⚡Treasury Bonds: $31.5 billion

These figures reveal that banks prefer MBS over Treasury bonds, which are traditionally considered safer. Repo transactions involve the withdrawal of liquidity by reversing it the following day, but such interventions reflect the stress levels in the market. Liquidity demand increases, especially during periods such as year-end, quarter-end, and month-end, as banks need cash due to balance sheet adjustments and regulatory requirements.

🤔The most striking point lies in the collateral composition. MBS are mortgage-backed securities and were one of the triggers of the 2008 financial crisis. The value of these assets is sensitive to fluctuations in interest rates and developments in the real estate market. Increased use of MBSs by banks may signal a decrease in their high-quality collateral holdings (e.g., Treasury bonds) or that they are holding these assets for other purposes.
⚡This suggests increased systemic risks: If there is a slowdown in the real estate market, the value of MBSs may fall, leading to ripple effects in the repo market.
⚡Comparatively, in normal times, banks tend to offer Treasury bonds as collateral because they are considered highly liquid and risk-free. The fact that MBSs (approximately 58% of the total) outweigh Treasury bonds (42%) suggests that banks may be under balance sheet pressure. The Fed's completion of this operation with "full allocation," meaning it met all demand, confirms a real liquidity crunch in the market.

Market Impacts and Broader Perspective
This injection occurred at a time when global liquidity levels were at record highs. The Fed appears to have increased similar interventions in recent months; For example, $40 billion in additional liquidity was provided in December.
This could support risk assets (stocks, cryptocurrencies) in an environment where the interest rate reduction cycle continues. Indeed, assets like Bitcoin rose following this news.
However, there are long-term concerns: the Fed's balance sheet expansion could increase inflationary pressure and affect the value of the dollar. Furthermore, such interventions could encourage inefficiency by allowing "zombie companies" to survive. The intensive use of the Permanent Repo Facility, established based on lessons learned from the 2008 crisis, reminds us that the system is still fragile.

In conclusion, while this event provides short-term relief, imbalances in the collateral structure could be signals of future crises. Market participants should closely monitor how the Fed addresses this issue in upcoming meetings.
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