NEW YORK, April 3 Reuters Wall Street is bracing for a potential bout of stress in money markets by putting some cash on the side ahead of U.S. tax day, when high taxrelated outflows could hurt market liquidity.

Tax season, which culminates on April 15 when income tax returns are to be submitted to the U.S. federal government, is typically associated with a drop in financial sector liquidity as individuals draw down cash from bank deposits and money market funds to pay their taxes.

Liquidity, measured by bank reserves at the Federal Reserve and the Fed39;s overnight reverse repo facility RRP a favored place for money market funds to park their cash is still considered abundant, but high capital gains from booming stock markets last year could make outflows particularly sizeable this year, analysts have said, a scenario that could lead to a surge in shortterm interest rates.

It could be bumpy getting over that period, said Joseph D39;Angelo, head of PGIM Fixed Incomes money markets team. To be defensive … you would effectively manage your maturities in such a way that you make sure you have enough liquidity in front of that date, he said.

Having more cash available ahead of tax day could also allow fund managers to take advantage of any potential volatility, some of them said, should borrowing costs increase because of higher demand for cash.

Spencer Hakimian, CEO of Tolou Capital Management, a New Yorkbased macro hedge fund, said he would be ready to buy…