Triple Pressures on Fed, Treasury, and Congress Mount: Goldman Sachs Warns of Liquidity Crisis in 2027

Author: Dong Jing, Wall Street CN

The U.S. money market is quietly approaching a tipping point. A latest Goldman Sachs research report warns that bank reserves are at the edge of the steep portion of the demand curve, and triple pressures from the Federal Reserve, the Treasury, and Congress will converge in the second half of 2027, at which time the repo market faces risks of severe volatility.

In her latest report released on November 10, Goldman Sachs Rate Strategist Isabella Rosenberg noted that current system liquidity is "just enough to make everything look normal, yet insufficient to handle any unexpected shocks."

The report expects that the rebuilding of the Treasury General Account (TGA) triggered by the debt ceiling in 2027 will coincide with larger-scale Treasury auctions, aftermaths of forced repo clearing, and stagnant growth in money market funds, creating multiple tightening pressures.

Meanwhile, the Fed is currently in a rare state of policy contradiction: within the same month, the Fed is expected to restart purchases of short-term Treasury bills (T-bills), while Fed Governor Waller has already publicly signaled a potential 50 basis point rate hike. A December rate hike is fully priced in by the market, and the 2-year U.S. Treasury yield had already spiked to 4.61% before the release of CPI data.

Goldman Sachs expects the Fed to begin cutting rates in the second half of 2027, a timeframe that heavily overlaps with the period of most concentrated liquidity risk.

Beneath the Surface Calm, Reserves Are Already on the Edge of a Cliff

In 2026, the repo market remained generally stable. Data from Goldman Sachs shows that the Secured Overnight Financing Rate (SOFR) has consistently traded about 2 basis points below the Fed's Interest on Reserve Balances (IORB) since May, while the Triparty General Collateral Repo rate (TGCR) averaged about 4 basis points below IORB. Goldman's models indicate that financing costs have even fallen below levels implied by fundamentals since the second half of the year.

Rosenberg attributes this calm to multiple factors aligning simultaneously: reserves remaining range-bound, declining financing demand, banks' greater willingness to utilize the Fed's Standing Repo Facility (SRF), and regulatory changes such as eSLR revisions and triparty repo improvements enhancing dealers' intermediation capacity.

However, Goldman's scatter plot reveals a key risk: at the same reserve levels (the 11% to 12% range), the system has previously experienced repo rates up to 13 basis points above IORB (as seen in the September 2025 liquidity squeeze), while also entering loose states where rates were 2 to 9 basis points below IORB. Identical liquidity conditions yield completely opposite outcomes.

Goldman describes current reserve levels as "at the edge of the steeper portion of the demand curve," meaning the system is equally close to either extreme.

Figure: Goldman Research showing the distribution relationship between bank reserves as a percentage of assets and the overnight repo spread (TGCR-IORB)

Currently, reserves account for approximately 11% of bank assets, down from the ~14% starting level during the 2025 liquidity stress event, and only slightly above the trough levels seen in 2019.

The Fed: Hiking Rates While Buying Bonds

The current policy contradiction facing the Fed is that it is expected to resume buying T-bills in November, while the market has fully priced in a December rate hike.

Goldman expects the Fed to restart its Reserve Management Purchases (RMP) this month at a pace of approximately $10 billion per month, maintaining this until the first quarter of 2027, before increasing to roughly $25 billion per month from Q2 2027 onward. This pace is estimated to be the necessary level to keep the share of reserves to bank assets stable.

Figure: Actual pace of the Fed's Reserve Management Purchase (RMP) plan versus Goldman's forecast through end of 2027

When factoring in the reinvestment of maturing MBS proceeds into T-bills, Goldman forecasts the Fed's total monthly purchase size of T-bills will double from around $20 billion in the winter period to approximately $40 billion after April. On its own, the RMP alone will add roughly $255 billion to reserves throughout 2027.

Goldman also explicitly stated that it is unlikely the Fed will restart quantitative tightening (QT) due to temporarily eased financing conditions. The report notes that the liquidity easing caused by TGA declines during the debt ceiling period is a short-term phenomenon. Once the ceiling is lifted and the TGA is rebuilt, liquidity will reverse quickly, exposing financing costs to upside risks.

On a longer-term horizon, Goldman assumes the Fed will continue purchasing T-bills until their weight in the Treasury portfolio reaches a market-neutral level, projected to occur around 2028.

The Treasury: $1.1 Trillion in T-bills, Where Are the Buyers?

Goldman forecasts that U.S. net bond supply will see a modest increase from $2.1 trillion to $2.2 trillion in 2027, but with a structural tilt toward the short end: net T-bill supply will rise by approximately $200 billion to $1.1 trillion, requiring non-Fed buyers to absorb an amount climbing from roughly $480 billion this year to about $600 billion.

The problem lies in the fact that growth in T-bills' natural buyers (money market funds) has stalled. In both 2024 and 2025, money market funds saw annual net inflows of approximately $800 billion; however, capital inflows flattened out after July this year, bringing the full-year cumulative total to just about $250 billion.

Goldman explains that strong returns in risky assets and higher long-end yields have attracted capital into long-dated bond funds; even with heightened equity market volatility recently, investors prefer to extend duration rather than move to cash. Furthermore, money market funds have proactively shortened their weighted average maturity (WAM) amid concerns over Fed rate hikes, reducing their demand for the Treasury's 3-month and 6-month T-bills.

The report states that Waller's signal of a 50 basis point rate hike further strengthened funds' motivation to maintain short durations. Consequently, the spread of T-bills relative to overnight index swaps (OIS) has widened, a trend Goldman believes is far from over.

Regarding Treasury issuance composition, Goldman expects auction sizes to expand starting in August 2027, concentrated in the 2-to-10-year sector. Long-end issuance will remain unchanged, with risk appetite slightly trimmed.

Congress: The Debt Ceiling Remains the Biggest Wildcard

Goldman anticipates the $41.1 trillion debt ceiling will hit its constraint in Q1 2027 (most likely in February). Thereafter, the Treasury cannot issue new net debt and must rely on drawing down TGA balances and rolling over T-bills to operate. Every dollar flowing out of the TGA injects reserves into the banking system.

Referencing the past three debt ceiling events, the TGA declined by an average of roughly $400 billion from hitting the limit to reaching a final agreement. Goldman estimates that this scale of TGA drawdown, combined with corresponding reductions in T-bill supply, will exert downward pressure of about 4 basis points on SOFR (roughly 1 bp per $100 billion).

Since Treasury cash balances approached $1 trillion in August this year, a higher starting balance would imply an even greater potential decline.

As a result, spring and summer 2027 could see an unexpectedly loose financing environment: rising reserves, shrinking T-bill supply, and repo trading further below IORB.

However, with Democrats taking control of both congressional chambers in January, markets broadly expect debt ceiling negotiations to drag on, with "X dates" predicted primarily in Q4 2027. Following the election, BMO's Vail Hartman warned, "Financial markets may face a protracted debt ceiling impasse, risking sovereign debt rating downgrades, price distortions around the X date, and increased volatility in cash and repo markets."

Once the ceiling is lifted, the Treasury will rebuild cash balances through massive T-bill issuance, completely reversing the previous dynamic: reserves will plummet, T-bill supply will surge, and repo rates will spike. Goldman notes that broader usage of the SRF and a clearer understanding of the definition of "ample reserves" will help cushion the shock, but cannot eliminate it.

Historical Precedents: Two TGA Rebuilds, Two Crises

The Goldman report cites two historical cases, both demonstrating how TGA rebuilds at low reserve levels triggered systemic shocks:

2019: The debt ceiling was suspended in early August, prompting the Treasury to immediately rebuild cash balances. On September 17, overnight repo rates spiked to 10%. Operating already within a rate-cutting cycle, the Fed launched a $60 billion monthly T-bill purchase program in mid-October, designating it as "non-quantitative easing."

2025: The debt ceiling was raised in July, leading the Treasury to rebuild cash balances. On October 31, banks drew a record $50 billion from the SRF. The Fed subsequently ended QT, cut rates three times within the year, and initiated a $40 billion monthly T-bill purchase program in December.

Both episodes concluded with the Fed cutting rates and expanding its balance sheet within months of the TGA rebuilds. In both instances, officials had previously stated publicly that reserves were ample.

Diverging Forecasts Converging on the Same Event

Goldman economists forecast the Fed will begin cutting rates in H2 2027, lowering the federal funds rate back to the 3.25%–3.5% range through three cuts in early 2028, citing inflation, oil prices, and AI-related factors.

However, overlaying this rate cut timeline against Rosenberg's liquidity calendar reveals significant overlap: TGA rebuilding, surging T-bill supply, larger Treasury auctions starting in August, aftermaths of forced clearing, and stagnant money fund growth are all clustered within the same timeframe.

The report concludes that Fed policy should still act as a stabilizing force in financing markets at that point, but the "path may be bumpy, with various obstacles emerging along the way, and risks of tighter financing conditions will gradually build later in the year."

Notably, if the Fed remains focused on core CPI pressures and reluctant to address repo market disorder with rate cuts, the first step of the next easing cycle might not manifest in the federal funds rate, but rather quietly through an expansion in T-bill purchase volumes, where Goldman's forecast of $25 billion per month could simply represent a floor.