According to Woofun AI, the US money market is quietly approaching a critical tipping point. Goldman Sachs (GS.US) research issued a severe warning: as bank reserves fall to about 11% of assets, the triple pressure from the Federal Reserve, Treasury, and Congress will be released centrally in 2027. At that time, the repurchase market faces the risk of sharp fluctuations, and the possibility of a liquidity crisis in 2027 will rise significantly.
Goldman Sachs interest rate strategist Isabella Rosenberg pointed out in a report released on November 10 that the current system's liquidity is in a fragile balance, “just enough to make everything look normal, but not enough to handle any unexpected shocks.” According to the data, current reserves account for about 11% of bank assets. This level is only slightly above the low during the 2019 crisis, and lower than the starting point of about 14% when the tight liquidity incident occurred in the fall of 2025. What's even more worrisome is that the system is already on the edge of a steep demand curve. The Goldman Sachs model revealed that at the same reserve level of 11% to 12%, the market experienced two very different extremes: in the fall of 2025, a repurchase interest rate of 13 basis points higher than the excess reserve interest rate (IORB) was generated, while recently it was less relaxed than IORB 2 to 9 basis points. Goldman Sachs believes that there are also two technical reasons behind this round of calm: first, SOFR has been stable at about 2 basis points below IORB since May, and the three-party general guarantee interest rate (TGCR) is about 4 basis points lower; second, eSLR revisions and improvements in the guaranteed repurchase market have enhanced the intermediary ability of traders.
This huge dispersion indicates that the system is equally close to the two extreme states, and any slight disturbance can cause drastic fluctuations.
The Federal Reserve is currently mired in a rare policy contradiction: on the one hand, the market has completely raised interest rates in December, and Federal Reserve Governor Waller publicly released a signal of 50 basis points of interest rate hike, driving 2-year US Treasury yields to jump to 4.61% before the CPI data is released; on the other hand, the Federal Reserve is expected to restart the purchase of short-term treasury bills (T-bills) in November. Goldman Sachs anticipates that the Federal Reserve will launch the Reserve Management Purchase Program (RMP) at a scale of about $10 billion per month, maintain it until the first quarter of 2027, and then increase it to about $25 billion per month from the second quarter of 2027 to maintain a stable reserve ratio.
If MBS matures and reinvestments are included, the Federal Reserve's total monthly purchases of T-bills will double from about $20 billion in winter to about $40 billion after April. RMP alone will add approximately $255 billion to reserves for the full year 2027. Goldman Sachs made it clear that the Federal Reserve is unlikely to restart contraction (QT) due to short-term liquidity easing, and assumes that it will continue to buy T-bills until its share of the treasury bond portfolio reaches a market-neutral level, which is expected to happen around 2028.
Data compiled by Woofun AI shows that changes in the Ministry of Finance's supply structure have increased market pressure. Goldman Sachs predicts that the US net bond supply will increase slightly from $2.1 trillion to $2.2 trillion in 2027, but the structure is skewed towards the short end: net T-bills supply will increase by about $200 billion to $1.1 trillion, and the portion to be digested by non-Federal Reserve buyers will rise from about $480 billion to about $600 billion this year.
However, the growth of natural buyers of T-bills — money market funds — has stalled. In 2024 and 2025, the net inflow of money market funds during the year was about 800 billion US dollars; however, capital inflows leveled off after July of this year, and the cumulative total for the whole year was only about 250 billion US dollars. Strong returns on risky assets and higher long-term returns attract capital to long-term bond funds. Even with recent increases in stock market volatility, investors tend to prolong periods rather than switch to cash.
Furthermore, money market funds took the initiative to shorten the weighted average maturity date (WAM) due to concerns about the Federal Reserve's interest rate hike, causing their demand for 3-month and 6-month T-bills issued by the Treasury to weaken. After Waller released a 50 basis point rate hike signal, the fund's motivation to maintain a short period of time was further strengthened, and the spread of T-bills compared to overnight index swaps (OIS) widened as a result. In terms of treasury bonds, Goldman Sachs expects the auction scale to expand from August 2027, focusing on a 2- to 10-year period, remain unchanged in the long run, and risk bias will be lowered slightly.
The congressional debt ceiling game became the biggest variable. Goldman Sachs expects the $41.1 trillion debt ceiling to hit the restraint line in the first quarter of 2027 (most likely in February). Since then, the Ministry of Finance has been unable to add net debt; it can only maintain operations by consuming TGA balances and repaying T-bills. Referring to the past three debt ceiling events, the TGA declined by an average of about $400 billion between hitting the cap and finally reaching an agreement. Goldman Sachs estimates that this scale of decline in TGA combined with a corresponding reduction in T-bills supply will exert downward pressure on SOFR by about 4 basis points (about 1 basis point for every $100 billion). Since the Treasury's cash balance was close to $1 trillion in August of this year, the potential decline would be even greater if the starting balance were higher. As a result, there may be an unexpectedly relaxed financing environment in the spring and summer of 2027: increased reserves, reduced supply of T-bills, and repurchase rates lower than IORB.
However, after the Democratic Party took over both houses of Congress in January, the market generally anticipated that debt ceiling negotiations would be protracted, and X-date predictions focused on the fourth quarter of 2027. BMO (BMO.US)'s Vail Hartman warned after the election, “Financial markets may face a protracted debt ceiling impasse, leading to the risk of downgrading sovereign debt ratings, price distortions around X, and increased volatility in the cash and repurchase markets.” Once the upper limit is lifted, the Ministry of Finance will rebuild the cash balance by issuing T-bills on a large scale. The whole process is completely reversed: reserves plummeted, supply of T-bills surged, and repurchase interest rates jumped.
Historical precedents show that TGA reconstruction can easily trigger systemic shocks when reserves are close to low levels. In 2019, the debt ceiling was suspended in early August, and the Ministry of Finance immediately rebuilt its cash balance, and the overnight repurchase rate soared to 10% on September 17. The Federal Reserve launched a $60 billion monthly T-bills purchase program in mid-October while it was already in a cycle of cutting interest rates, and characterized it as “non-quantitative easing.” In 2025, the debt ceiling was raised in July, the Treasury rebuilt cash balances, and banks withdrew a record $50 billion from the SRF on October 31. The Federal Reserve immediately terminated QT, cut interest rates three times during the year, and launched a $40 billion monthly T-bills purchase program in December. Both events ended with the Federal Reserve cutting interest rates and expanding the balance sheet within a few months after the TGA was rebuilt, and before both incidents occurred, officials had publicly stated that reserves were abundant. These cases warn that the current calm may only be a brief pause before the storm.
Goldman Sachs economists predict that the Federal Reserve will begin cutting interest rates in the second half of 2027, reducing the federal funds rate back to the 3.25%-3.5% range through three interest rate cuts in early 2028, citing factors related to inflation, oil prices, and AI. It should be clarified that the above path was the version before the October CPI was announced; after the CPI exceeded expectations on November 10, Goldman Sachs chief US economist David Mericle pushed back the time of the first interest rate cut from September to December 2027, raised the number of interest rate hikes to three times, the peak interest rate rose to 4.25%-4.5%, and the number of interest rate cuts was changed to four times accordingly.
However, when comparing this schedule of interest rate cuts with Rosenberg's liquidity calendar, the two are highly coincident: TGA reconstruction, a surge in T-bills supply, larger treasury bond auctions starting in August, mandatory liquidation deadlines in mid-2027, and stagnant money market fund growth, all concentrated in the same time window. The Goldman Sachs report concluded that the Federal Reserve's policy should remain a stabilizing force for the financing market at that time, but “the path may be bumpy, various obstacles will appear along the way, and risks of tightening financing will gradually accumulate later in the year.”
It is worth noting that if the Federal Reserve is still dealing with core CPI pressure and is unwilling to cut interest rates to respond to the disorderly repurchase market, the first step in a new easing cycle may not appear in the federal funds rate, but will quietly be reflected in the expansion of T-bills purchases — Goldman Sachs predicts $25 billion per month, or will only be the lower limit.