Rising Treasury Activity and Its Impact on Equity Market Liquidity and Volatility

The U.S. Treasury repo market has surged to unprecedented levels, reaching a gross size of $11.9 trillion in 2024, driven largely by opaque bilateral repo transactions. This expansion, coupled with shifting convenience yields and tightening liquidity conditions, is reshaping the dynamics between fixed-income and equity markets. As repo volumes grow and Treasury settlements strain short-term funding, equity liquidity metrics-particularly for the S&P 500-have shown signs of fragility. Investors must now grapple with the interplay of repo-driven liquidity reallocation, volatility constraints, and the evolving safe-haven status of U.S. Treasuries.

Repo Volumes and Equity Liquidity: A Tenuous Balance

The surge in Treasury repo activity has created a dual-edged sword for equity markets. While repo markets provide critical funding for dealers and institutional investors, their expansion has also introduced systemic risks. For instance, a $150 billion liquidity drain from Treasury settlements in late 2025 exacerbated equity market stress, contributing to a sharp decline in the S&P 500. This phenomenon underscores how repo-driven liquidity constraints can directly suppress equity momentum, particularly during periods of heightened volatility.

The April 2025 tariff announcements further illustrated this tension. Treasury market liquidity deteriorated temporarily, with bid-ask spreads widening and order book depth collapsing to levels not seen since March 2023. These conditions rippled into equity markets, where the S&P 500 faltered as financing costs for overnight repo rose. The Federal Reserve's intervention-executing a $29.4 billion overnight repo operation in October 2025-highlighted the central bank's role in stabilizing a system increasingly sensitive to Treasury-driven liquidity shocks.

Repo Rate Volatility and Liquidity Metrics

Repo rate fluctuations have emerged as a key driver of equity market liquidity dynamics. The spread between the Reverse Repo Facility (RRP) and SOFR widened to 27 basis points in 2024, reflecting uneven liquidity distribution and dealer balance sheet pressures. This volatility, amplified by quantitative tightening (QT), has created a fragile equilibrium: while healthier spreads benefit dealer profitability, they also heighten the risk of sudden liquidity dislocations.

Equity liquidity metrics have mirrored these repo-driven shifts. In the E-mini S&P 500 futures market, trading volume surged by 99% in Q2 2025 compared to Q1, yet order book depth declined during volatile periods. This duality-higher volume but reduced depth-suggests that liquidity assessments must account for multiple metrics, including fill quality and price dispersion. The April 2025 tariff episode, for example, saw Treasury bid-ask spreads reverse quickly as market conditions stabilized, but the broader equity market remained vulnerable to cascading repo rate shocks.

Declining Convenience Yields and Safe-Haven Reassessment

The convenience yield of U.S. Treasuries-a measure of their liquidity and safety premium-has eroded significantly. The AAA-UST spread narrowed from 67 basis points (2012–2019) to 36 basis points in 2025, while the 10-year swap spread turned negative. This decline reflects a loss of confidence in Treasuries as a risk-free asset, driven by rising fiscal deficits and regulatory shifts. As a result, investors are increasingly reallocating to alternative safe havens, including the Japanese yen, Swiss franc, gold, and short-duration sovereigns according to State Street.

This reallocation has implications for equity markets. A weaker safe-haven status for Treasuries could reduce their ability to absorb liquidity during crises, forcing investors to seek alternatives that may not offer the same depth or fungibility. For example, the Office of Financial Research's 2024 update to exclude affiliate repo trades from tri-party segment reporting revealed that non-affiliate volume had declined, signaling a structural shift in repo market composition. Such changes could amplify cross-asset volatility as investors navigate a fragmented safe-asset landscape.

Actionable Insights for Investors

1. Hedge Against Liquidity Shocks: Investors should prioritize strategies that account for repo-driven liquidity constraints. For instance, maintaining a buffer of short-duration assets or using derivatives to hedge against repo rate volatility could mitigate equity market downturns during Treasury settlement cycles.
2. Diversify Safe-Asset Portfolios: With U.S. Treasuries losing their convenience yield, diversifying into alternative safe havens-such as gold or yen-denominated assets-can provide more robust downside protection.
3. Monitor Repo Market Signals: Closely tracking repo rate spreads, dealer balance sheet expansions, and regulatory developments (e.g., potential SLR exemptions for Treasuries) will help anticipate liquidity shifts. The Fed's October 2025 repo operation underscores the importance of central bank interventions in stabilizing repo conditions.

Conclusion

The interplay between rising Treasury repo volumes and equity market liquidity is a defining feature of 2024–2025 market dynamics. As repo markets grow more opaque and convenience yields erode, investors must adapt to a landscape where liquidity reallocation and volatility constraints are inextricably linked. The S&P 500's momentum remains vulnerable to repo-driven shocks, but strategic hedging and diversification can help navigate this complex environment.