(Bloomberg) — The Treasury’s latest tax collection may preview how the shrinking of the Federal Reserve’s $9 trillion balance sheet, or quantitative tightening, will unfold for the markets and global liquidity. 

The influx of personal tax receipts pushed the amount of cash in the Treasury’s account at the central bank to $908 billion as of April 20, the most since May 2021, data show. The Treasury General Account, or TGA, operates like the government’s checking account at the Fed. When Treasury increases its cash balance, that’s on the liability side of the Fed’s balance sheet, so as that goes up, it drains reserves from the system, and vice versa.

The result was that outstanding bank reserve amounts fell by $466billion in the week ending April 20, which is the highest weekly decrease on record according to Fed data. 

“Even if the boost to TGA (and hence drain to reserves) was likely a one-off factor associated with year-end tax payments, some of which should now reverse, the medium-term trajectory remains clear: QT is likely to make the outlook for global liquidity for the rest of this year look much more like Q1 than like the spring break markets had been afforded in recent weeks,” Citigroup Inc (NYSE:). In a note to clients, Matt King was a global market strategist. 

After revealing more information in the minutes from the March meeting, the Fed will likely announce plans for its balance sheet. This announcement is most likely to be made next week. But it’s just as important how market players — including the Treasury — will respond to the Fed’s moves, and that remains a major unknown. 

There is a possibility that this will manifest itself as a sharp decrease in bank reserves and deposits. If so, it could increase pressure on the repurchase agreement rates, and any borrowing benchmarks, such as the Secured overnight Financing Rat, and cause an upward trend in repurchase agreement interest rates. 

This would result in a further tightening in overall financial conditions, in addition to an increase in the target fed funds rate that the central banks intends to keep boosting. The move could affect liquidity and cause dislocations in various parts of the U.S. markets, such as futures and swap spreads.

Meanwhile, if the Treasury chooses to lean more heavily on issuance of bills rather than longer-term debt to plug the funding gap that will emerge from the Fed stepping back, the amount of excess cash in short-term markets — much of which is currently parked at the central bank’s reverse repo facility — could dwindle. This could potentially put upward pressure on short-term rates.

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