By Gertrude Chavez-Dreyfuss

NEW YORK, April 13 (Reuters) - U.S. funding markets head into the April 15 tax deadline with ample liquidity that should help limit any cash squeeze in the financial system, as the Federal Reserve continues to absorb large volumes of Treasury bills through its balance sheet operations.

Wednesday marks the U.S. federal deadline for income tax returns, an event that typically drains cash from the market as households pull cash from bank deposits and money market funds to make tax payments. In normal years, that outflow can tighten funding conditions.

The temporary drawdown is expected to push overnight repurchase, or repo, rates higher. Repos allow hedge funds and banks to borrow money using Treasuries as collateral. The Secured Overnight Funding Rate (SOFR), the benchmark repo rate, has historically risen by about 2 basis points on April 15, analysts said.

The looming tax deadline also coincides with a large Treasury security settlement of $50 billion for recently issued debt, analysts said, putting further upward pressure on funding rates.

Even so, strategists say the risk of disruption is limited, largely because the U.S. central bank has been injecting cash back into the system by buying T-bills.

"The Fed has been conducting reserve management purchases to increase the amount of liquidity and reserves in the system, preventing it from encountering a cash crunch around the tax date," said Gennadiy Goldberg, head of U.S. rates strategy, at TD Securities in New York.

"We suspect that these purchases have been sufficient to increase the amount of liquidity in the system ... and expect any distortions to be minimal."

The U.S. central bank began buying Treasury bills under a program called "reserve management purchases," aimed at bolstering liquidity and ensuring it maintains control over overnight interest rates. Under the initiative, the Fed purchases about $40 billion in Treasury bills per month.

Those purchases are on top of the roughly $15 billion the Fed is reinvesting in Treasury bills from the proceeds of its maturing mortgage-backed securities (MBS), a move announced by the U.S. central bank at its policy meeting last October.

REDUCED NET SUPPLY

Those purchases have significantly reduced the net supply of Treasury bills available to private investors, pushing their prices up and yields down. Analysts said the smaller supply has helped relieve pressure in funding markets more broadly and kept overnight repo rates anchored.

SOFR USDSOFR= ended at 3.61% on Friday, the latest data available from the New York Fed's website showed. That figure is lower than the Interest on Reserve Balances (IORB) - the rate the Fed pays banks on excess reserves. It currently is 3.65%.

Over the last 21 trading days, SOFR has been nearly 0.9 bp below IORB on average, analysts said. In contrast to this calm environment, SOFR was 10 bps over IORB in early November 2025.

The relationship between SOFR and the IORB is closely watched as a gauge of funding stress. In general, SOFR should trade at or below IORB because abundant reserves should keep banks from having to lend cash overnight in repo markets at rates above what they can earn on a risk-free basis at the Fed.

Higher bank reserve levels typically mean less funding pressure and suggest that financial firms have ample cash to meet payments, margin calls and withdrawals.

"The move lower in ... SOFR relative to IORB is evidence, in our view, that we are temporarily back to a lightly abundant reserves regime," Citi strategist Alejandra Vazquez Plata wrote in a research note. "We think funding markets are unlikely to face significant stress on Tax Day."

Bank reserves at the Fed, one of the measures of liquidity in the financial system, stood at $3.2 trillion, the latest data from the central bank showed this week, suggesting substantial funding cushion for any potential squeeze in the market.

"The tax date is very well telegraphed, (so) that it's not going to be a concern. The market is not worried about it," said Vishal Khanduja, head of the broad markets fixed income team at Morgan Stanley Investment Management in Boston.

He added that the same stability has been notable in the bond market over the last six weeks of the Middle East war.

At "the depth of the market, in terms of bid-ask spreads, between dealers making markets, even in very disorderly and big moves that we saw in the middle of the conflict, liquidity was high."