Thread by @Mayhem4Markets

The Treasury may issue up to $700B in T-bills just weeks after any debt ceiling resolution, pulling liquidity out of the market.

While the lack of issuance was helpful to offset the impacts of QT, such a sizable issuance is like an amplifier for tightening financial conditions.

What does this mean in plain English?

QT gets steroids.

We've been on a vacation from it, in essence, since October because initially all of the PBoC and BoJ expansion of liquidity.

Then Treasury issuance paused in mid-January.

This has all helped to boost the markets.

Now Treasury issuance is coming back, and in a big, big way.

This while we've seen PBoC and BoJ a bit less aggressive in their monetary measures.

Why does this matter?

Because it is likely to significantly amplify the impacts of QT by draining bank reserves.

While some have suggested it was TGA spending that added liquidity to the market, I would say that TGA spending is a very, very temporary driver as most of it is paying bills, and those bill payments don't often stay in bank reserves for too long. That money often has velocity.

The resumption of issuance is actually a big deal, as the absence thereof has helped to subdue the tightening impact of QT and high rates.

Now that we're facing up to $1.2T of issuance by 9/30 and $700B within weeks of the debt ceiling resolution, it's time to consider impacts.

The most likely initial impact is a removal of excess liquidity.

Particularly if the reverse repo market continues to stay well supported, with over $2T parked daily.

Then we'll see bank reserves drop, and with it excess liquidity.

This tends to put upward pressure on rates.

That upward pressure could drive risk assets lower, like stocks, crypto, and others that are rate sensitive.

Particularly the longer duration risk, like tech, growth stocks, and other more speculative stocks.

Why does this matter?

Because it may mark the end of this prolific bear market rally.

But more important than that, it may reintroduce a lot of risk that's ostensibly been on vacation to the global financial markets.

What's most important isn't the debt ceiling negotiations, but how long they take and what happens afterwards.

If the negotiations continue to stall out we may see a gov't shutdown, but the delay is the key.

The longer they wait, the larger issuance will become.

A gov't shutdown could cause some economic ripple impacts if it lasts for several weeks or longer, which won't be great for a GDP that's had no small level of support from non-defense gov't spend.

But delaying issuance only magnifies how much is necessary per week before 9/30.

Why 9/30?

It's the end of the gov't fiscal year, and there's a lot of budgets that need to be satisfied before then.

So the majority of issuance we see is likely to kick off before then.

Right now it is expected to be $1.2T in total size.

So if we resolve this by June, that's about $300B/month (4 x $300B = $1.2T).

But if we see stalling until July, then that's about $400B/month (3x $400B = $1.2).

The longer it takes, the more problematic the scale of issuance becomes.

It's already the largest ever expected.