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This week saw an unexpected surge in usage of the Fed’s Standing Repo and surging SOFR rates. What’s it all mean?

Here’s what you need to know, in simple English ⬇️

What is a “repo”?

This week saw an unexpected jump in use of the Fed’s Standing Repo Facility (“SRF”) as well as heightened SOFR rates. If that sounds like Latin to you, don’t worry- here’s what it means:

A ‘repo’ transaction is just a very short-term (usually overnight) loan between two parties. That loan is secured by collateral, usually in the form of Mortgage Backed Securities (“MBS”) or US Treasuries.

Example:

Nakamoto Bank is tight for cash to fund operations and pay an upcoming tax bill. It can sell assets, or it can pledge those assets for a short-term cash injection, so Nakamoto Bank goes to the Fed’s SRF operation and pledges $10 billion of US Treasuries. Immediately, the Fed provides $10 billion in dollars.

The next day, Nakamoto Bank goes back to the Fed and pays back the $10 billion, plus a small amount of interest (that interest rate will become important later).

That’s it, now you understand a “repo”

Fed’s Repo Facility Sees Massive Usage

This “Standing Repo Facility” is supposed to be a last resort, and generally over the past five years, it’s seen very little usage. Of course, from Q2-Q4 of 2025 it started to heat up, due to a building liquidity shortage and this is why the Fed quickly announced they’d start printing again (Reserve Management Purchases, or “RMP”) in order to address the cash shortage.

Now, it’s common to see liquidity crunches on tax deadline or at the end of the month/quarter, as banks rush to shore up their books. What’s not normal is to see the third highest usage since 2020, especially given the fact that neither of those scenarios are present and given the RMP’s (QE-like money printing) being conducted by the Fed, which have served to inject freshly printed dollars into the financial system.

But wait, it gets worse… SOFR also started to climb above the Fed’s upper bound, indicating the Fed was losing control over the most important price in the world - the price of a dollar.

Secured Overnight Financing Rate - SOFR

In a somewhat-related vein, there is a repo market for financial institutions where these overnight repos can be conducted with each other. This market is where things like the infamous “basis trade” (100x levered trade that’s responsible for 40% of demand for Treasury bonds) are financed.

That is where the SOFR rate comes from. About $3.2 trillion is lent out, each and every day in this market and interest rates are assessed individually to each transaction, based on the supply and demand of dollars and quality of the collateral.

Imagine that liquidity is tight, and Nakamoto Bank is the only bank with any cash on Wall Street. Everyone else is scrambling for cash. Demand is sky high. Well, Nakamoto Bank gets to charge a very high price, with the price of money being the interest rate. When the demand for cash outpaces the supply, the price (interest rate) must go up.

Sure enough, this is what we saw over the past week: SOFR was approaching the Fed’s upper limit. Remember, the Fed doesn’t actually set one overnight rate- they set a range, with the upper limit being the Standing Repo interest rate. This upper limit is the Fed’s way of saying, “No matter how scarce dollars get, we’ll always sell them to you at 3.75%”. Their goal, is to keep SOFR below that rate.

When SOFR is above the upper bound (or below the lower bound), the Fed has lost control and liquidity is dangerously low.

So, what caused it and what's next?

The fact that we had unusual and large SRF usage as well as elevated SOFR rates, indicates this was something significant to keep an eye on.

Since we’re not at the end of the month/quarter, nor at a tax deadline, one of the most immediate culprits is the record amount of US Treasury bills that are being sold. Just on Wednesday alone, over $210 billion in Treasuries were auctioned off. When a bank buys a T-bill, they pay dollars to the Treasury department and get a security (T-bill) in exchange, thereby removing liquidity from the system.

This record amount of debt issuance is clearly straining liquidity to a significant degree. We know the Fed was so concerned over what was happening in repo markets in the 2nd half of last year, that they decided to start printing $50 billion in new dollars each month (RMPs).

If these liquidity strains persist, we’re likely to see them ramp those purchases up. Put another way, the printer will have to step it up and print more dollars.

They absolutely cannot allow another repo rate crisis like in September of 2019 because they can’t allow the basis trade to blow up, or they’ll lose about HALF the demand for US Treasuries. They were VERY concerned about the repo market last year and we had very unusual comments from the Fed Chair, the Fed Governor responsible for financial stability as well as both the former and current SOMA manager (person who actually manages the Fed’s balance sheet).

What does this mean for Bitcoin?

Liquidity conditions matter for Bitcoin.

When funding markets tighten and cash becomes scarce, risk assets tend to struggle in the short term.

But if repo stress forces the Fed to increase liquidity injections, as it did following prior funding market disruptions, that backdrop has historically been supportive for scarce assets over longer horizons.

In other words, short-term liquidity stress can create volatility. Policy response to that stress often becomes the bigger story.

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