April tax deadline pivotal for funding markets, Fed’s balance sheet–analysts

AS April’s tax deadline nears, so does the risk of disruptions in US funding markets, according to Wall Street analysts.

That’s because, broadly speaking, the annual rush to pay Uncle Sam tends to suck hundreds of billions of dollars from the banking system. With Americans expected to owe more than usual this year due to higher incomes and a booming stock market, bank reserves could potentially fall below a key level many speculate is critical to funding-market stability.

For some, it’s rekindling memories of 2019, when a sudden increase in corporate tax payments along with a slug of bond issuance and other factors prompted demand for liquidity to suddenly surge, causing overnight lending markets to go haywire and forcing the Federal Reserve to intervene. While nobody’s predicting turmoil on that scale, the potential for ructions shouldn’t be ignored either, market watchers say.

“The most important thing to watch out for is how close we’re actually getting to the lowest comfortable level of reserves,” said Teresa Ho, head of short-term interest-rates strategy at Jpmorgan Chase & Co. “This time we’re seeing liquidity being withdrawn from the system. It’s a slightly different dynamic than month- and quarter-end, but still has the potential to be disruptive.”

Bank reserves, cash that institutions park at the Fed to meet unexpected demands, stand at $3.5 trillion, and with Wall Street forecasting potential taxrelated outflows nearing at least $400 billion, reserves could slide close to the comfortable level generally seen in the low $3 trillion level.

In short-term funding markets, the first place any tax-related stresses are likely to appear is in a rising Secured Overnight Financing Rate—a key benchmark tied to day-to-day needs of the financial system—as investors scramble for cash and liquidity dries up, according to Ho. Volumes in the federal funds market should also be watched for a pickup in borrowing activity, she said.

SOFR hit peaks at the end of November and December amid a conf luence of events including banks paring back lending for regulatory purposes.

So far, cumulative tax receipts for individuals through March are $44 billion higher than the same time last year, according to strategists at Societe Generale, led by Subadra Rajappa, who predict a stronger April this year than in 2023 when it was $381 billion, but not as strong as 2022.

Two years ago, the Treasury collected nearly $600 billion in tax revenues due to an exuberant stock market and a powerful economic recovery, and $446 billion left the banks, according to government and Fed figures. Those payments are deposited in the Treasury General Account, or TGA, which operates like the government’s checking account at the central bank. The Fed keeps tabs on this side of the balance sheet because as TGA rises, reserves fall.