Is the U.S. market not doing well next week either? The wave of U.S. bond issuance is coming, adding "frost on the snow" to liquidity.

A massive wave of US bond issuance is set to hit the market next week. In the past week, the market value of tech giants evaporated by nearly a trillion dollars, dragging the Nasdaq to its largest weekly decline in seven months. Concerns about overvalued stocks, weak economic signals, and a decline in consumer confidence all contributed to the backdrop of this sell-off. Adding to the woes, the US Treasury Department plans to auction a total of $125 billion in various term government bonds next week. Additionally, the market is expected to see approximately $40 billion in investment grade corporate bond issuances. In a shortened trading week due to the holiday, such concentrated bond supply will pose a significant test to market liquidity. This upcoming wave of bond issuance coincides with a critical liquidity warning in the US money market. Due to the government shutdown forcing the Treasury Department to hoard cash, market liquidity has been significantly drained, akin to multiple rate hikes, which could amplify market volatility and risk with any new funding needs. With the massive influx of US bonds looming, market resilience will be tested. According to the US Treasury's quarterly refinancing plan, next week will see a series of intensive bond auctions: - On Monday, $58 billion of 3-year government bonds will be sold, - On Wednesday, $42 billion of 10-year government bonds will be sold, - On Thursday, $25 billion of 30-year government bonds will be sold. All of these securities will settle on November 17th. With the bond market closed on Tuesday for the Veterans Day holiday, the bulk supply will be squeezed into a compressed trading week. Deputy Assistant Secretary of the Treasury Brian Smith stated that the bond issuance aims to refinance maturing debts and raise approximately $26.8 billion in new funds from private investors. Smith also emphasized that the Treasury plans to maintain the current auction sizes of nominal coupon bonds and floating rate notes at least until early 2026. Furthermore, Smith highlighted that the monthly auction sizes for 2-year to 30-year government bonds will remain stable until January. The Treasury will rely on weekly treasury auctions and cash management bills to address short-term borrowing fluctuations. The department plans to slightly reduce the issuance of short-term government bonds in December, with expectations of a resurgence in bond auction sizes by mid-January. "Invisible tightening": liquidity alarm bells have long been ringing The upcoming bond issuance next week is garnering attention as it will impact an already fragile liquidity environment. Huawei Wall Street previously referred to several key indicators highlighting the increasing severity of a liquidity crisis in the US financial system. On October 31st, the Secured Overnight Financing Rate (SOFR) surged by 22 basis points, widening the spread with the Federal Reserve's excess reserve rate to the highest level since March 2020. According to ICAP's data, the general collateral repurchase rate has continued to experience sharp fluctuations above the Federal Reserve's policy rate range. The fundamental reason for the liquidity stress lies in the rapid expansion of the Treasury General Account (TGA) balance over the past three months. To cope with the government shutdown, the Treasury withdrew over $700 billion in cash from the market, causing the TGA balance to skyrocket from around $300 billion in July to surpass $1 trillion. This action directly led to the Federal Reserve's bank reserves dropping to the lowest level since early 2021, with foreign commercial banks' cash assets plummeting by over $300 billion in four months. Analysts believe that this scale of liquidity withdrawal has a tightening effect comparable to multiple rate hikes. Bank of America liquidity experts Mark Cabana and Katie Craig have previously warned that the deterioration of the funding situation exhibits dangerous self-reinforcing characteristics. If critical indicators continue to deteriorate, it could trigger a chain reaction similar to the 2019 repo crisis. Article source: Huawei Wall Street; GMTEight Editor: Chen Xiaoyi.