August eleventh, two thousand twenty-five
《TGA Rebuild 101: Another Piece of the Puzzle on Potential Risks》
TGA Rebuild Basics: Another Piece of the Puzzle on Potential Risks
Over the next two months, bank reserves in the market may be drained by TGA replenishment, and, acc According to the U.S. Treasury’s target, it is expected to reach 8500 hundred million dollars by the end of month 9; the current TGA balance is 4210 hundred million dollars, This means that an increase of more than 4000 hundred million dollars within 8 weeks would be one of the most aggressive TGA replenishments in the past 10 years.
U.S. government deficit spending, such as actual expenditures or tax cuts, increases the balances in households’ bank accounts, effectively injecting net assets directly into them. Commercial bank deposits therefore rise, as do commercial banks’ reserves at the Federal Reserve.
When the government wants to replenish the Treasury account (TGA), it issues Treasury securities, but the purpose is not to finance deficit spending; it is to add funds to its account at the Federal Reserve. The result of this replenishment is a decline in bank reserves, with no new money added to the private sector.
Below is Waller’s explanation of TGA and ample reserves in his speech last month:
...
The Federal Reserve’s second-largest liability is the Treasury General Account (TGA),The Federal Reserve is the fiscal agent of the U.S. Treasury, which means we are the bank of the U.S. government, and TGA is the Treasury’s checking account.
What are the characteristics of TGA? First, it is a short-term liability, and the Treasury pays interest on the balance in its account as it collects funds. Finally, because the timing of tax and other revenue does not match the timing of bill payments, funds flow into and out of the account, causing its balance to fluctuate. The balance of TGA can fluctuate significantly, especially when the debt ceiling is binding.
In 2024, TGA typically fluctuated between about 6500 hundred million and 9500 hundred million dollars, and briefly peaked at about 9600 hundred million dollars during the tax season in 4. Because of this year’s debt ceiling constraints, TGA fell from the 2024 annual average of 7800 hundred million dollars to about 3250 hundred million dollars most recently; now that the debt ceiling has just been raised, it will be replenished rapidly over the coming weeks.Therefore, it is not unusual for TGA to fluctuate by hundreds of billions of dollars.
This is completely different from 2007, when TGA was deliberately kept at a steady level of 50 hundred million dollars per day. This change reflects both the significant growth in federal spending in the interim and an accounting adjustment in 2015: the Treasury decided to keep about a week’s worth of federal payments in TGA to better manage cash flows.
...
Unlike cash, the problem with TGA is that it can fluctuate significantly, leading to greater volatility in the total amount of reserves in the system. TGA is connected to reserves in the following way: when taxpayers pay taxes to the Treasury, we debit the reserve account of taxpayers’ banks and credit the Treasury’s TGA account; when the Treasury makes payments, we debit the TGA account and credit the reserve accounts of the recipients’ banks. Therefore, sharp fluctuations in TGA can affect the Federal Reserve’s reserve management policy.
There are two ways to address this: 1) hold a reserve buffer to ensure that fluctuations in TGA do not affect market liquidity; 2) hold short-duration assets that can be expanded or contracted as needed to hedge (offset) fluctuations in TGA, thereby keeping the total reserves in the banking system unchanged.
The first strategy means that the buffer assets can have a relatively longer duration, while the second may require holding short-term assets that are easy to buy and sell and have very little interest rate risk.
This brings us to the reserve question...
I view “ample reserves” as a threshold—below it, banks need to scramble to find safe, liquid funds, which pushes up the federal funds rate and money market rates across the market.We have experience testing the level of “ample reserves” when the financial system came under stress in 2019. At the start of that year, reserves were about 8% of nominal GDP. We were still shrinking the balance sheet, but there was no clear stress at banks or across the financial system. By 2019 9, reserves had fallen below 7% of nominal GDP, and the financial system began to show stress, forcing the Federal Reserve to step in and take measures to increase reserves.Therefore, my basic view is that problems emerge when reserves fall below 8% of GDP.
Some might argue that banks are now larger relative to GDP and may therefore want to hold more reserves. Another genuine concern is that the distribution of reserves within the banking system matters as well as their total amount. So I would add a buffer to the 8% GDP ratio mentioned earlier and regard 9% as the threshold below which reserves are no longer ample. In today’s terms, that means about 2.7 trillion dollars in reserves could be considered ample—perhaps a little more or a little less in reality, but I would use it as a reference point.
...
Bank reserves currently stand at 3.3 trillion dollars. Given the ongoing quantitative tightening and the large-scale replenishment of TGA, reserves may soon fall below 3 trillion dollars, equivalent to less than 10% of nominal GDP. The last time bank reserves were below 10% of nominal GDP was in 2018 -2019, which ultimately triggered stress in the repo market in 2019 9.
When bank reserves are scarce, the U.S. banking system is less willing to lend reserves in the repo market (against Treasury collateral) and becomes more conservative in taking on risk.
Chart: The ample-reserves threshold
The TGA target of 8500 hundred million dollars was badly missed in 6, and is now being put forward again as a target for 9—this process must be closely monitored. If the Treasury really replenishes TGA this quickly while the fiscal stimulus from tariffs fades, then, when bank reserves are nearing scarcity, banks are less willing to provide repo financing, and the financial leverage system lacks lubrication....The timing would be right at the end of September, and, as we have repeatedly mentioned, the U.S. economy could also be entering a soft patch at exactly that point.
The chart below shows Instances in history when the TGA balance rose significantly; source: an article published by Citi in 7 titled “TGA rebuild presents tactical equity downside risk”:
Chart: Periods in history when the TGA balance rose significantly
Chart: Declining bank reserves are often accompanied by volatility in risk assets
When a rise in the TGA balance translates into a decline in bank reserves, it is often accompanied by a decline in equities, wider credit spreads, and a weaker dollar.In any case, at a minimum, the aggressive replenishment of TGA will remove yet another positive factor for the U.S. economy, because the decline in the TGA balance this year boosted U.S. bank reserves and thereby lifted global central bank liquidity indicators.
This further supports our view that global assets will begin to shift in 10.
We ask the traders in our own trading room to produce a single-market note roughly every 2 days, covering U.S. equities, A-shares and Hong Kong, and commodities. We select the better ones to share in the corresponding small groups (we also include some of our own commentary, though we do anonymize some details).
Those interested can subscribe as needed (subscribe only if you need it; don’t waste your money):
U.S. equities:https://www.meridianresearch.app/home?product=us-strategies(Xingzhi)
A-shares and Hong Kong:https://www.meridianresearch.app/home?product=asia-strategies(Ganglong)
Commodities:https://www.meridianresearch.app/home?product=commodity-strategies(Dixin)
As for the level of detail, it will probably be down to the industry level. On the mainland, we’ll try to avoid crowded trades; if we write too specifically, someone may front-run us. We may be able to be more specific on U.S. equities, but readers will still need to think things through and fill in the gaps themselves, There are no trades to copy directly!。
The overall win rate has been pretty good lately.
We don’t know whether everyone likes this new format for the Notes. If you think there’s a better approach, please leave a like to let us know. Based on the feedback we receive, we’ll decide whether to continue with this type of content or return to the previous column format.
All the best.
2025.08.11
Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.