Liquidity Injection by the Federal Reserve System

✨Last night of 2025, as always, became a tense turning point for financial markets. Year-end balance sheet adjustments, regulatory pressures, and seasonal liquidity needs prompted banks to seek short-term financing, forcing the Federal Reserve (Fed) to intervene and inject a record amount of liquidity to prevent potential market shutdown. On December 31, 2025, the $74.6 billion provided through overnight repo operations via the New York Fed's Permanent Repo Fund was recorded as one of the largest interventions in the post-pandemic era. However, the detail that truly drew attention and caused tremors in the markets was the collateral structure underlying this massive injection: banks favored mortgage-backed securities (MBS), known for their risky history, over traditionally safer Treasury bonds. This once again reminded us of the ghosts of the 2008 crisis, exposing vulnerabilities in the system.
⚡ $74.6 billion intervention preventing market lockup and warning signals in collateral structure

The Federal Reserve (Fed) injected $74.6 billion of liquidity into the market through overnight repo operations on December 31, 2025, to prevent a potential freeze of the financial market. This intervention was carried out via the New York Fed's Permanent Repo Fund and aimed to reduce pressure caused by year-end operations.
⚡ This amount is recorded as one of the highest since the COVID-19 pandemic and indicates that banks are turning to the Fed for short-term financing.

✨ Details of the intervention
This Fed operation allowed banks to receive cash in exchange for providing their securities as collateral. The distribution of the total $74.6 billion by collateral type was as follows:
⚡Mortgage-backed securities (MBS): $43.1 billion
⚡Treasury bonds: $31.5 billion

These figures show that banks prefer MBS over Treasury bonds, which are traditionally considered safer. Repo operations involve withdrawing liquidity by returning it the next day, but such interventions reflect market stress levels. The need for liquidity increases especially during periods like year-end, quarter-end, and month-end, as banks require cash due to balance sheet adjustments and regulatory requirements.

🤔 The most striking aspect is the collateral composition. MBS are mortgage-backed securities, and they were one of the triggers of the 2008 financial crisis. The value of these assets is sensitive to interest rate fluctuations and developments in the real estate market. An increase in the use of MBS by banks may indicate a decline in their high-quality collateral (for example, Treasury bonds) or that these assets are held for other purposes.
⚡ This points to rising systemic risks: if the real estate market slows down, the value of MBS could decrease, triggering a chain reaction in the repo market.
⚡ In comparison, under normal conditions, banks prefer to use Treasury bonds as collateral because they are considered highly liquid and risk-free. The fact that MBS (account for approximately 58% of the total) surpass Treasury bonds (42%) indicates that banks may be under balance sheet pressure. The completion of this Fed operation with a “full allocation,” meaning fulfilling the entire demand, confirms the presence of a real liquidity crisis in the market.

Impact on the Market and Broader Perspective
This injection occurred at a time when global liquidity levels reached record highs. It appears that the Fed has increased such interventions in recent months; for example, $40 billions in additional liquidity were provided in December.
This could support risk assets (stocks, cryptocurrencies) amid a continuing cycle of declining interest rates. Indeed, assets like Bitcoin rose following this news.
However, there are long-term concerns: expanding the Fed’s balance sheet could intensify inflationary pressures and affect the dollar’s value. Moreover, such interventions may contribute to inefficiencies, allowing “zombie companies” to survive. The intensive use of the Permanent Repo Fund, built on lessons from the 2008 crisis, reminds us that the system remains vulnerable.

In conclusion, while this event provides short-term relief, imbalances in the collateral structure may serve as signals of future crises. Market participants should closely monitor how the Fed addresses this issue in upcoming meetings.
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