Michael Burry Says Fed's New Treasury Buying Plan Shows US Banks Are Weaker Than They Look: 'Not A Sign Of Strength But A Sign Of Fragility'

On Wednesday, Michael Burry, the investor best known from "The Big Short" for predicting the 2008 housing collapse, warned that the Federal Reserve's move to restart Treasury bill purchases is less about stability and more about a financial system growing dependent on Fed support.

Burry Flags Fresh Warning Signs in the Banking System

Burry took to X and cited a Financial Times blog saying that the Fed's plan to begin "reserve management purchases" — or RMPs — signals growing fragility in the U.S. banking system.

He pointed to the central bank's decision to stop shrinking its balance sheet and prepare to buy roughly $35 billion to $45 billion in Treasury bills each month, a move analysts expect to begin in January.

"I would add that 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," he stated.

He noted that the system required only about $2.2 trillion before the 2023 banking turmoil and just $45 billion in 2007.

"So I'd say US Banks are getting weaker way too fast," he added.

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Concerns Over Fed–Treasury Alignment

Burry also questioned the timing, noting that the Treasury has been issuing more short-term bills to avoid pushing 10-year yields higher.

He suggested that the Fed's decision to focus its buying on those same bills looked "awfully convenient."

Burry argued that the Fed now appears to expand its balance sheet after every crisis to avoid funding stress in the banking system — a dynamic he said helps explain the stock market's strength.

"The practical limit of this might be full nationalization of the US bond market – the Fed owns all $40 trillion US debt. So party on, I guess," he wrote.

Fed Ends QT As Money Markets Show Strain

The Fed formally ended quantitative tightening earlier this month after shedding about $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 concerns about liquidity.

Economists at Evercore ISI, Bank of America and Goldman Sachs said the Fed will likely roll out RMPs to rebuild a reserve buffer and stabilize overnight rates.

Fed Rate Cut Lifts Market Sentiment

Meanwhile, the Federal Reserve'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 Russell 2000 — tracked by the iShares Russell 2000 ETF (NYSE:IWM) — gained 1.36%.

The Dow Jones rose 1.05%, the S&P 500 added 0.67% and the Nasdaq 100 advanced 0.42%.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.