Michael Burry sounds alarm as US Federal Reserve plans $40B T-bills purchase

Michael Burry, an investor known from “The Big Short” for predicting the 2008 housing collapse, has warned against the US Federal Reserve’s plans to purchase $40 billion in Treasury bills (T-bills). According to him, the initiative is less about stability and more about a financial system that has become dependent on Fed support.

Michael Burry took to X and stated that the Fed’s plan to begin “reserve management purchases” (RMPs) signals growing fragility in the US banking system. 

He pointed out that the US banking system is fragile, with reserves growing from $45 billion in 2007 to more than $3 trillion today. He said this reliance is a sign of weakness, not strength, and could lead to permanent balance sheet expansion or complete nationalization of the $40 trillion US debt market.

Michael Burry says RMPs are a hidden attempt to stabilize banking sector

Fed Chair Jerome Powell announced that the US Federal Reserve will buy T-bills worth $40 billion per month to help manage market liquidity levels, ensuring the central bank retains firm control over its interest rate target system.

Michael, on the other hand, questioned the timing, noting that the Treasury has been selling more short-term bills to keep 10-year yields from going up. He said that the Fed’s decision to buy those same bills seemed “awfully convenient.”

According to him, the plan is essentially a hidden attempt to stabilize a banking sector still struggling with the aftershocks of the mini-banking crisis two years ago. He revealed that bank reserves stood at just $2.2 trillion before the crisis, compared to over $3 trillion today.

“If the US Banking system can’t function without $3+ trillion in reserves/life support from the Fed, that is not a sign of strength but a sign of fragility,” Burry added.

According to him, the dynamic helps explain the stock market’s strength. 

“Seems that after every crisis, now the Fed needs to expand its balance sheet permanently or guarantee a bank funding crisis. No wonder stocks are doing well,” he wrote.

The Fed formally ended quantitative tightening earlier this month, having shed approximately $2.4 trillion in assets since 2022. The move comes as funding markets, particularly the $12 trillion repo market, show increasing volatility. 

Short-term repo rates have repeatedly broken above the Fed’s target range, raising liquidity concerns. Burry sees it as further evidence of underlying financial system weakness.

Burry suggests investors stay away from bank stocks

Burry highlighted a shift in the US Treasury toward selling more short-term bills and the US Fed’s focus on buying those. This strategy helps avoid driving up 10-year treasury yields. As expected, the US 2-month Treasury yield (US2M) has increased, and the US 10-year Treasury yield has decreased following the FOMC meeting.

Burry also suggests that investors stay away from bank stocks. Burry revealed that he prefers to keep cash in Treasury Money Market Funds for amounts over the $250,000 FDIC limit. At the same time, a Bloomberg dot plot indicates that the Fed anticipates gradual rate cuts to approximately 3% by 2026. 

Meanwhile, the Fed’s third consecutive interest-rate cut boosted market sentiment on Wednesday, driving strong gains in several high-beta stocks linked to clean energy, crypto mining and space technology. The Dow Jones rose 1.05%, the S&P 500 added 0.67% and the Nasdaq 100 advanced 0.42%.

However, Bitcoin price fell more than 2% in the past 24 hours ahead of the Bitcoin options expiry. According to reports, BTC miners are selling, with Marathon Digital (MARA) dumping 275 BTC worth $25.31 million. The coin is currently trading at $90,369.

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