Reserves Are Fine. The Composition Is Not.

Nobody is short dollars. Somebody is short duration.

The layer nobody watches

Money has a price and a quantity. Rates coverage is almost entirely about the price. The quantity - who holds the reserves and where they sit - is where the plumbing actually breaks.

Three numbers describe it: reserve balances at the Federal Reserve, the Treasury General Account, and the overnight reverse repo facility. Together they tell you how much cash is sitting where in the system.

The mechanical identity

Reserves, currency in circulation, the Treasury General Account and the reverse repo facility are all liabilities of the consolidated government sector. When the TGA builds, reserves drain. When the reverse repo facility empties, reserves build.

This is not theory. It is an accounting identity, and it explains more of the past three years of liquidity than any narrative.

A Treasury rebuild funded by bill issuance drains reserves. A TGA drawdown releases them. Same headline deficit, opposite liquidity effects.

Why it matters for the corridor

The overnight rate printing just below the administered rate tells you reserves are still abundant. The effective rate is trading where you would expect when there is no scarcity of cash.

That is the counterweight to the front-end selloff. The price of money is rising because of the expected policy path, not because the system is short cash. Those are very different risks with very different hedges.

The danger is convergence: a front end selling off into a genuine reserve drain. That is when funding stress and policy repricing reinforce each other rather than offsetting.

What to watch

The spread between the overnight rate and the administered rate is the cheapest stress indicator available. It is near zero now. Watch it widen.

Then the TGA path. A rebuild into a heavy bill calendar pulls cash out of the system at exactly the moment the front end is already fragile.