Our focus is to assess the strength of U.S. funding markets as a core pillar to manage investment risk: it’s essential to track key indicators that measure liquidity, credit availability, and overall market confidence.
The strength of U.S. funding markets can be assessed through a combination of repo rates (SOFR, DTCC data), commercial paper markets, Treasury liquidity measures, and Federal Reserve liquidity usage. While FRED, the New York Fed, and the Federal Reserve Board’s reports provide the best free sources, specialized platforms like Bloomberg and CME Group offer deeper insights for professional traders.
Funding Market Indicators for Risk Managed Investments
1. Secured Overnight Financing Rate (SOFR)
• What it Measures: SOFR is the benchmark interest rate for overnight borrowing in the U.S. Treasury repurchase (repo) market, reflecting the cost of secured short-term funding.
• Why it’s Important: A rising SOFR suggests tightening liquidity, while a stable or declining SOFR indicates easier access to short-term funding.
• Where to Find it:
• Federal Reserve Bank of New York
• FRED (Federal Reserve Economic Data)
2. Repo Market Rates and Volume (DTCC & Fed Data)
• What it Measures: Tracks rates and transaction volumes in the tri-party repo and bilateral repo markets.
• Why it’s Important: Spikes in repo rates indicate funding stress, while steady rates signal normal market conditions.
• Where to Find it:
• Treasury Kinetics | DTCC (repo transaction data)
• Repo Operations - FEDERAL RESERVE BANK of NEW YORK
3. Commercial Paper (CP) Rates and Outstanding Volumes
• What it Measures: Interest rates and outstanding volumes of short-term corporate borrowing (CP market).
• Why it’s Important: Higher CP rates or shrinking outstanding volumes suggest funding pressures on corporations.
• Where to Find it:
• Federal Reserve Board - CP Rates
• FRED (CP Outstanding Volumes)
4. LIBOR / SOFR-OIS Spread
• What it Measures: The difference between SOFR (or its derivatives like OIS) and LIBOR (or its replacement).
• Why it’s Important: A widening spread suggests credit stress and funding constraints.
• Where to Find it:
• ICE LIBOR Data
5. Treasury Liquidity Measures
• What it Measures: Market depth and bid-ask spreads in the U.S. Treasury market, a critical indicator of overall funding liquidity.
• Why it’s Important: Poor liquidity in Treasuries often signals broader funding market stress.
• Where to Find it:
• Federal Reserve Board - Publications
• [Market depth on Bloomberg (for premium users)]
6. Federal Reserve Liquidity Facilities Usage
• What it Measures: The level of borrowing from Fed liquidity programs, such as the Standing Repo Facility (SRF)and Discount Window.
• Why it’s Important: Increased borrowing from the Fed suggests stress in private funding markets.
• Where to Find it:
• Federal Reserve H.4.1 Report
7. Bank Reserves and Money Supply (M2)
• What it Measures: The amount of reserves banks hold at the Fed and overall money supply growth.
• Why it’s Important: A decline in reserves can indicate a tightening funding environment.
• Where to Find it:
Best Free Platforms to Track U.S. Funding Market Liquidity
1. Federal Reserve Economic Data (FRED)
• Offers real-time and historical data on interest rates, repo markets, and bank reserves.
• Provides SOFR, repo rates, and liquidity operation data.
• Displays daily repo market transaction data.
4. CME Group
• Offers futures data related to interest rates and SOFR spreads.
5. Federal Reserve Board (H.4.1 Report)
• Shows liquidity facility usage and Fed balance sheet details.
🔔 Key Alerts for U.S. Funding Markets to Manage Investment Risk
1. Secured Overnight Financing Rate (SOFR) Spikes
• Alert Trigger: If SOFR rises significantly (e.g., 25-50 bps in a single day) or moves above a key threshold(historically, around 5% would be concerning).
• Significance:
• A sharp increase in SOFR suggests tightening liquidity conditions in the repo market.
• This could signal funding stress, especially if the Fed isn’t actively draining reserves.
• Where to Set Alert:
• FRED (SOFR Data) → Create alert for changes above a defined threshold.
• New York Fed SOFR Page (SOFR Rates) → Manually track.
2. Repo Market Rate Spikes (DTCC Data)
• Alert Trigger: If overnight repo rates exceed SOFR by 50+ bps or the spread widens unusually.
• Significance:
• A significant gap between repo rates and SOFR suggests counterparty risk concerns or liquidity constraints.
• Could indicate stress in short-term borrowing markets and possible intervention from the Fed.
• Where to Set Alert:
• DTCC Treasury Kinetics.
• FRED → Set alerts for repo rates exceeding predefined levels.
3. SOFR-OIS Spread Widening
• Alert Trigger: If the SOFR-OIS spread (difference between SOFR and Overnight Indexed Swap rate) widens beyond 20-30 bps.
• Significance:
• A rising spread signals increased credit risk and funding stress.
• A rapid increase often precedes financial crises (e.g., 2008 repo market freeze).
• Where to Set Alert:
• CME Group SOFR Futures (SOFR Futures)
• Bloomberg (if available) → Set alerts for SOFR-OIS widening.
4. Commercial Paper (CP) Rates Rising Rapidly
• Alert Trigger: If CP rates for AA-rated issuers jump 25-50 bps in a short period.
• Significance:
• Rising CP rates indicate corporations facing higher short-term borrowing costs.
• Could signal banking stress or increased default risk in the corporate sector.
• Where to Set Alert:
• Federal Reserve Board CP Rates Page (CP Data)
• FRED CP Rates & Outstanding Volumes (FRED CP Data)
5. U.S. Treasury Market Liquidity Measures
• Alert Trigger: If bid-ask spreads widen or market depth declines significantly.
• Significance:
• Poor Treasury market liquidity often precedes funding crises and can disrupt financial markets.
• It indicates investor uncertainty and increased risk aversion.
• Where to Set Alert:
• Federal Reserve Financial Stability Reports.
• FRED Treasury Market Depth Metrics (if available).
6. Federal Reserve Liquidity Facility Usage (H.4.1 Report)
• Alert Trigger: If borrowings from the Fed’s Discount Window or Standing Repo Facility (SRF) rise sharply.
• Significance:
• Increased Fed borrowing suggests stress in private funding markets.
• Historically, this precedes market turmoil (e.g., 2008, 2020 liquidity crises).
• Where to Set Alert:
• Federal Reserve H.4.1 Report
• FRED - Discount Window Borrowing
7. Bank Reserves at the Federal Reserve
• Alert Trigger: If bank reserves decline sharply (suggesting liquidity withdrawal) or rise unexpectedly (suggesting emergency injections).
• Significance:
• Declining reserves suggest tightening financial conditions.
• Rising reserves may indicate Fed intervention to stabilize funding markets.
• Where to Set Alert:
• FRED - Bank Reserves (Bank Reserves Data)
💡 Why These Alerts Matter for Risk Managed Investments
• 🚨 Early Warning System: These alerts predict liquidity stress before it impacts broader markets.
• 📉 Market Timing: Watching repo spreads, CP rates, and Fed liquidity usage can help traders hedge against funding stress.
• 🔍 Macro Signals: Policy makers and institutional traders track these signals to gauge systemic risks.