What Happens to IG Credit Spread (OAS) When the Convex Net Liquidity Index Contracts?
What happens when aggregate USD net liquidity contracts? Impact on risk assets, Bitcoin, and equity multiples when Fed balance sheet minus TGA minus RRP falls.
How IG Credit Spread (OAS) Responds
Scenario Background
The Convex Net Liquidity Index measures the total dollar liquidity available to the financial system: Fed balance sheet (WALCL) minus Treasury General Account (WTREGEN) minus reverse repo facility usage (RRPONTSYD). This construction captures the actual dollars circulating in commercial banking and broader markets, as opposed to reserves sitting idle at the Treasury or the Fed.
Read full scenario analysis →Historical Context
Net liquidity peaked near $6.3T in early 2022 before declining through 2023 as QT began and the TGA rebuilt. The 2023 regional banking crisis prompted the BTFP and a temporary liquidity injection, followed by renewed contraction through 2024. Bitcoin's 2022 drawdown from $69k to $15k coincided with a roughly $1.5T decline in net liquidity. The 2020-2021 expansion from $4T to $6.3T produced the largest asset price bull run of the modern era across equities, crypto, housing, and private markets.
What to Watch For
- •WALCL declining faster than $95B per month (accelerated QT)
- •TGA rebuilding above $800B
- •RRP balance rising back toward $1T
- •Net liquidity declining for 3+ consecutive months
- •S&P 500 forward P/E compressing alongside liquidity contraction
Other Assets When the Convex Net Liquidity Index Contracts
Other Scenarios Affecting IG Credit Spread (OAS)
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