What Happens to 1-3Y Treasury (SHY) When Bank Reserves Collapse?
What happens when bank reserves fall sharply? Repo market stress, funding conditions, and potential Fed response.
How 1-3Y Treasury (SHY) Responds
Scenario Background
Bank reserves are the deposits commercial banks hold at the Fed. Reserves are the ultimate settlement asset in the US financial system and the key variable in the Fed's operational framework. When reserves are abundant, interbank markets function smoothly; when reserves become scarce, funding stress can emerge rapidly.
Read full scenario analysis →Historical Context
Reserves peaked near $4.3T in late 2021 post-COVID QE and declined toward $3.3T by early 2024 through QT. The September 2019 repo crisis coincided with reserves near $1.5T under a different framework. The 2023 regional banking stress (SVB, Signature) raised deposit-to-reserve sensitivity. Japan's banking system operated with low reserves for decades but had different institutional structure.
What to Watch For
- •Bank reserves below $3T and declining
- •SOFR-IORB spread positive and widening
- •Repo GCF rate spikes
- •Fed statements on reserves ample-ness
- •Regional bank stress reemerging
Other Assets When Bank Reserves Collapse
Other Scenarios Affecting 1-3Y Treasury (SHY)
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