A massive wave of US Treasury issuance is set to hit markets next week, further straining liquidity conditions already under pressure.
The past week saw tech giants lose nearly $1 trillion in market value, dragging the Nasdaq to its worst weekly decline in seven months. The sell-off was fueled by concerns over stretched valuations, weak economic signals, and declining consumer confidence.
Compounding these challenges, the US Treasury plans to auction $125 billion worth of bonds across various maturities next week. Additionally, markets expect about $40 billion in investment-grade corporate bond issuance. This concentrated supply will test market liquidity during a holiday-shortened trading week.
The bond issuance comes as key US money market liquidity indicators flash warning signs. The Treasury's cash hoarding—prompted by government shutdown risks—has drained market liquidity equivalent to multiple rate hikes, amplifying volatility risks from new funding demands.
**Treasury Flood Tests Market Resilience**
Under its quarterly refunding plan, the Treasury will conduct: - $58 billion in 3-year notes on Monday - $42 billion in 10-year notes on Wednesday - $25 billion in 30-year bonds on Thursday
All securities will settle on November 17. With bond markets closed Tuesday for Veterans Day, this compressed schedule intensifies the supply pressure.
Deputy Assistant Treasury Secretary Brian Smith stated the auctions aim to refinance maturing debt while raising approximately $26.8 billion in new cash from private investors. He confirmed stable auction sizes for nominal coupons and floating-rate notes through early 2026, with monthly issuance of 2- to 30-year bonds unchanged until January. Short-term borrowing needs will be met via weekly bill auctions.
The Treasury plans modest bill issuance cuts in December before resuming increases by mid-January.
**"Stealth Tightening": Liquidity Crisis Brewing**
The bond sales will stress an already fragile liquidity backdrop. Recent indicators suggest escalating strains: - The Secured Overnight Financing Rate (SOFR) spiked 22 basis points on October 31, with its spread over the Fed's interest on reserves hitting March 2020 highs - General collateral repo rates have consistently traded above the Fed's policy band
The root cause lies in the Treasury General Account's (TGA) explosive growth—ballooning from $300 billion to over $1 trillion since July as shutdown preparations drained $700+ billion from markets. This has: - Reduced Fed bank reserves to 2021 lows - Slashed foreign bank dollar holdings by $300+ billion in four months
Analysts equate this liquidity withdrawal to multiple rate hikes. Bank of America's Mark Cabana and Katie Craig warn deteriorating conditions risk a self-reinforcing spiral reminiscent of 2019's repo crisis if key metrics worsen further.