Monthly Liquidity Snapshot

Liquidity & Sector Rotation  |  March 28, 2026  |  Liquidity Desk

1. The Liquidity Snapshot

Every week, the Fed publishes data that lets us calculate what I call Net Fed Liquidity, or NFL. It is a simple formula:

NFL = Fed Balance Sheet (WALCL)  minus  Treasury General Account (TGA)  minus  Reverse Repo (RRP)

Think of it this way: the Fed's balance sheet is the total pool of money the central bank has injected into the system. The Treasury keeps a cash account at the Fed (the TGA), and financial institutions can park money overnight through the reverse repo facility (RRP). Subtract those two drains and you get a rough measure of how much liquidity is actually available to flow into markets.

Here is where we stand as of March 25:

* Nominal signal only — quality deteriorating. See analysis below.

Fed Balance Sheet: In December 2025, the Fed formally ended its quantitative tightening program and began buying short-term Treasury bills to keep enough cash in the banking system. It calls this "reserve management" rather than quantitative easing, this is not stimulus, it is plumbing. The practical effect is that the balance sheet is no longer shrinking, and net liquidity now depends almost entirely on TGA and RRP dynamics.

Treasury General Account (TGA): In early March, the TGA dropped sharply from $913 billion to $832 billion, a hidden $81 billion liquidity injection. But since March 4, it has climbed back $42 billion. A rising TGA acts as a hidden drain, pulling liquidity out of the system even when the Fed's balance sheet is growing. Tax season typically pushes the TGA higher through April.

Reverse Repo (RRP): Essentially zero. This facility once held over $2 trillion. Its collapse to near zero means this source of liquidity injection is completely exhausted. There is no more fuel in this tank.

2. Why the Headline Number Is Misleading

Three problems with taking the +$57 billion NFL reading at face value:

First, the TGA has flipped direction. The early-March boost came from Treasury spending down its account. That is now reversing. If the TGA keeps rising through April, as it typically does around tax season, the next NFL reading could easily swing negative.

Second, the RRP is tapped out. For two years, the gradual decline of the reverse repo facility was a steady liquidity tailwind. With RRP at effectively zero, that tailwind is gone. Any future expansion has to come directly from the Fed's balance sheet or TGA drawdowns.

Third, the cycle peak was $7.137 trillion in September 2021. Current NFL is still $1.355 trillion, 19% below that level. We are operating in a structurally tighter environment than most of the post-COVID period.

The bottom line: liquidity is slightly positive on a one-month basis, but the quality of that signal is low and deteriorating.

3. Global Liquidity: Growing, but Not for the Right Reasons

Total M2 across the four major central banks (Fed, ECB, BOJ, PBOC) stands at approximately $99.7 trillion as of March 25. Over the three months through January, dollar-denominated global M2 grew by 4.1%. But dig into the components and the story is less encouraging.

A significant chunk of that three-month growth came from the dollar weakening by about 2.8% through January. Strip out the currency effect and the real growth rate drops to about 2.4%, above average but far from a liquidity boom. Since then, the picture has flipped: the dollar has strengthened roughly 2.4% over the past month, driven by safe-haven demand from the Iran conflict and the Fed's hawkish pivot on March 18. A stronger dollar compresses global M2 in dollar terms. The currency tailwind that inflated the headline number is gone.

The takeaway: global liquidity is growing in dollar terms, but the ECB and BOJ are actively draining, the Fed is in an ambiguous zone, and only China is genuinely easing. The stronger dollar now compresses the headline number further. This does not confirm the US NFL signal.

4. The Sector Rotation Matrix

I track the 11 S&P 500 sector ETFs across three timeframes. The picture right now is one of the clearest I have seen.

This is not normal sector rotation. In a typical rotation, money moves from one group to another. What we have here is different: everything is falling except the one sector directly tied to the geopolitical crisis. When Utilities and Consumer Staples, the classic safe havens are both down nearly 5 to 10 percent in a single month, that is not rotation. That is capital exiting the equity market entirely.

Over three months, a split has formed: Energy and commodity-linked sectors on one side, and everything else getting sold. But even the defensive sectors that were positive over three months are now losing money on a one-month basis. The split is breaking down.

5. The Cross-Asset Picture

6. The Inflation Complication

Before the war, inflation was behaving. February CPI came in at 2.4% year-over-year and core CPI at 2.5%. These were numbers that gave the Fed room to think about easing. That window just closed.

Brent crude has surged more than 40% since the strikes began on February 28. As of this week, Brent is trading around $103 and WTI around $95. The Strait of Hormuz, which handles roughly 20% of global oil supply, remains effectively closed. The March CPI print, due April 10, will be the first report to fully capture the energy price shock. Headline CPI could jump to 2.8% or higher, and if oil stays above $100, the April print could push past 3%.

Gold is trading around $4,430 today, down roughly 21% from its all-time high of $5,589 reached in January. The selloff reflects a straightforward repricing: the Fed's hawkish pivot on March 18 pushed real yields sharply higher, the dollar strengthened, and markets moved from pricing three rate cuts at the start of the year to pricing none at all for 2026. The longer-term thesis remains intact, but the easy part of the gold trade is behind us.

For the Fed, this creates an impossible dilemma. The economy is showing signs of slowing, equities down, hiring stumbling, but inflation is reaccelerating because of an external supply shock. The base case at the March 18 meeting was still one rate cut in 2026, but Powell was careful to qualify it: the rate forecast is conditional on inflation progress. More tellingly, when asked about rate hikes, he declined to rule them out: "We are prepared to do what needs to be done." Rate hikes are not the base case. But the fact they are being discussed tells you everything about how the regime has shifted.

7. What This Means for Positioning

8. What to Watch Next

April 10: March CPI. This is the most important data point in the next two weeks. A reading above 2.8% would confirm the inflation re-acceleration thesis and likely push 2-year yields higher.

TGA direction. If the Treasury General Account keeps rising toward $900 billion or above, the hidden liquidity drain will offset any gains from the Fed's balance sheet. This is the most underappreciated risk to the current NFL reading.

Strait of Hormuz shipping data. Daily transit volumes are the best real-time proxy for how long the oil supply disruption lasts. No normalization means no oil price relief means no Fed flexibility.

HYG/LQD ratio. Stable credit spreads are the last line of defense for the bull case. A break below 0.72 would be a serious warning signal.

The liquidity map technically says risk-on. Every other signal says be careful. When the numbers disagree, I trust the sector data and the bond market over a single monthly liquidity reading.

The war changed the regime. Make sure your portfolio reflects it.

This is the first issue of Liquidity Desk's monthly deep dive on liquidity and sector rotation. Published every last Friday of the month. If you found it useful, subscribe to get it every month.

Nothing in this publication constitutes financial advice. All content is for informational and educational purposes only.