Could we soon see a liquidity crisis? And what does this mean for the S&P 500 in the year's weakest month?

The US financial system is at a critical juncture. For several weeks, the Treasury has been conducting unprecedented $100 billion auctions of 4-week bills. The Treasury General Account (TGA) is growing, visibly draining liquidity from the market. Is this a natural normalization, or a signal of impending problems on Wall Street, especially in a month that is statistically dire for the US stock market?

The Liquidity Drain

Data from early September 2025 paints a clear picture of shifting liquidity dynamics within the US financial system. The Treasury General Account has surged from around $370 billion at the end of July to over $610 billion by early September (with a week-average level of $590 billion at the end of August), while key sources of liquidity are systematically shrinking.

Since the July trough, when the "One Big Beautiful Bill" was passed to allow for new debt issuance, the TGA has risen sharply, reducing market liquidity. Source: Bloomberg Finance LP

Usage of the Fed's Reverse Repo Facility (RRP) has seen a dramatic drop, falling to just $21.07 billion in early September—its lowest level since April 2021. This marks a spectacular decline from around $460 billion in mid-year. Goldman Sachs projects that bank reserves at the Fed will fall below $3 trillion by the end of Q3, despite some easing of pressure in funding markets.

The RRP data indicates that there is virtually no excess liquidity left in the market that needs to be absorbed. Source: Bloomberg Finance LP

When bank reserves at the Fed dropped below $3 trillion in 2022, from $4.2 trillion at the end of 2021, the S&P 500 experienced a sharp correction. Although the scale of the decline was not repeated, and reserves continued to fall in 2024 without a similar S&P 500 reaction, if reserves do fall below $3 trillion, it could be a genuine sign of declining liquidity, especially with such high US debt issuance—primarily short-term. Source: Bloomberg Finance LP, XTB

Record T-Bill Auctions as a Warning Sign

One of the most concerning signals is the Treasury's decision to hold record-breaking auctions of 4-week Treasury bills. In August, several $100 billion auctions were conducted—an unprecedented amount for such a short maturity. While this strategy allows the Treasury to take advantage of relatively lower interest rates at the short end of the curve, it poses serious risks. It is also worth noting that short-term rates are still significantly higher than, for example, the yield on 2-year notes. On the other hand, short-term yields are currently much lower than a year ago, while the yields on long-term bonds (20- and 30-year) are distinctly higher than they were a year ago. In the last 25 years, 30-year yields have rarely exceeded 5%, which theoretically creates an opportunity for long-term bond investors, though, of course, there is also a risk of long-term yields behaving similarly to those in the UK.

The current US yield curve (green line) versus a year ago (yellow line). Source: Bloomberg Finance LP

Analysts in the US debt market note that such a concentration on very short-term debt may signal government concerns about securing attractive bids for long-term bonds. The rising cost of debt servicing at higher interest rates is forcing the Treasury into continuous refinancing, which increases its vulnerability to interest rate fluctuations.

Following a sharp drop in mid-year for 4-week coupon auctions, the Treasury has recently held record $100 billion auctions. It is now suggested that their issuance will likely decrease in September, but this could still be a source of problems related to draining money from the market. Source: Bloomberg Finance LP, XTB

August was a record month for short-term coupon issuance. Source: Bloomberg Finance LP

Seasonal Threats in September

Historically, September has been the most challenging month for US equity markets, and the current liquidity situation further amplifies these seasonal risks. September liquidity issues have precedents—the repo crisis of September 2019 showed how quickly short-term funding tensions can emerge when reserves decline.

Wrightson ICAP warns that in the second half of September, the Treasury General Account is estimated to reach $860 billion, which, combined with corporate tax payments, could cause bank reserves to fall below $3 trillion for the first time since the pandemic. Lou Crandall from Wrightson ICAP predicts that visible problems in the overnight market could appear when aggregated Fed balances fall below $2.8 trillion.

The S&P 500 has typically declined in September over the last 20 and 30 years, statistically making it one of the worst months. Source: Bloomberg Finance LP

Wall Street and the Fed's Response

The Fed is attempting to balance the continuation of quantitative tightening with maintaining market stability. In March 2025, the Fed slowed the pace of its balance sheet reduction, capping monthly Treasury sales at $5 billion. This decision was intended to prevent liquidity tensions, but some Fed officials, like Christopher Waller, believe that reserves at over $3 trillion are still in a zone of "abundance."

The Fed's Standing Repo Facility (SRF) is becoming an increasingly important tool for liquidity management. In June 2025, SRF usage reached a record $11 billion, signaling a transition from an emergency tool to a routine mechanism for managing liquidity gaps. Some suggest that the current issues will force the Fed to end QT as early as October, which would be significant news for Wall Street and could potentially change the fate of indices, given the seasonality.

Crisis or Controlled Normalization?

An analysis of available data suggests that the current situation is more a controlled, though risky, normalization than an impending liquidity crisis. Key arguments for this scenario:

For Normalization:

• Bank reserves remain at a high level (over $3 trillion).

• The Fed has intervention tools at its disposal (SRF, swap lines).

• The QT process is being gradually slowed.

• The banking system remains well-capitalized.

Risk Signals:

• Record low RRP usage.

• Concentration on very short-term debt.

• Seasonal September tensions.

• Rising short-term funding costs.

Implications for Investors

Wall Street is preparing for potentially more volatile liquidity in the coming months. Key recommendations for investors include:

• Monitoring liquidity indicators—especially the level of bank reserves and SRF usage.

• Diversifying liquidity sources—not relying solely on traditional channels.

• Preparing for higher volatility—especially in interest-rate sensitive segments.

• Paying attention to the Treasury auction calendar—large issuances can impact liquidity conditions.

Long-Term Outlook

The current situation will likely force the Fed to end quantitative tightening sooner than originally planned. Wall Street currently predicts that QT will conclude in February 2026 with the Fed's balance sheet at $6.2 trillion. Goldman Sachs expects the Fed to finish its balance sheet reduction by the end of October 2025.

In the long term, the US financial system will likely have to adapt to operating at lower liquidity levels than during the pandemic, but higher than pre-2008. The Standing Repo Facility will probably become a permanent fixture of the financial architecture, offering a flexible mechanism for managing periodic liquidity shortfalls.

In conclusion, the US liquidity situation in September 2025 does not (yet) point to an imminent crisis, but it does represent a key transition moment to a new normal after a decade of extraordinary monetary easing. The success of this transformation will depend on the Fed's skillful management of the normalization process and the market's ability to adapt to more constrained but still sufficient systemic liquidity. If, however, it turns out that there is even less liquidity in the market than there is now, it would be a perfect recipe for a significant retreat on Wall Street from its current historical highs.