A heavy settlement calendar over a low-volume holiday week raises the risk of outsized volatility and potential downside in equities and Bitcoin.
The Video highlights a developing pattern in which equity declines consistently occur on Treasury settlement days, suggesting liquidity strains are directly impacting risk assets.
It was another rough week for risk assets, with the S&P 500 falling again. We had that big intraday reversal on Thursday following NVIDIA’s (NASDAQ:NVDA) results, and it hasn’t been any better for Bitcoin, which continues to get hammered — even into Saturday morning. Bitcoin alone is down 23 percent so far this month.
If what I’m about to show you is any guide to what’s likely to come this week, the selling pressure we’ve seen in the market likely isn’t over and could actually get significantly worse. Before I present the information, please remember to subscribe, like this video, and share it with your friends.
Over the last couple of months, for anyone watching the free version or who is a member, you know we’ve been focusing heavily on liquidity draining, TGA replenishment, the reverse repo facility, and reserve balances. It all sounds like boring stuff, but it is becoming a real contributing factor to what we’re seeing in the market. On top of that, we’ve been focusing on volatility dispersion, and those dynamics are also playing out as expected from when we started discussing them back in July and August.
Based on what I’m seeing, things could get worse, especially if the contributing factors continue — and I don’t see why they wouldn’t. The main thing I want to focus on today is the Treasury settlement calendar. This coming week, over the next five trading sessions — which is a holiday-shortened week — we don’t have trading on Thursday, and Friday is only a half-day. Many people will leave on Wednesday, making it a travel day as well. So volumes will probably be lower, which means liquidity will be even more limited.
This week, we’re expecting a $14 billion Treasury settlement on the 25th, a $47 billion coupon settlement on the 28th — which is Friday, a half-day of trading — and another $5 billion in T-bill settlements on the 28th. After we return from the Thanksgiving weekend, there is a large $83 billion coupon settlement.
What I’ve noticed from eyeballing the settlement calendar is that the recent big market moves have closely coincided with settlement dates. For example, the big turnaround occurred on the 20th, after NVIDIA’s results. The 18th was a rough market day, as was the 17th. If you’ve been casually observing the market and paying attention to settlement dates, you may have noticed that these dates have repeatedly aligned with high volatility in equities over the last few weeks.
I created a grid and tracked all the settlement dates to confirm what I was seeing. Starting on October 30th, we had nine settlement dates through the 20th. Out of those nine dates, seven saw lower market closes, with an average decline of 1.18 percent. The two positive dates were barely up — only 17 basis points combined. Using S&P 500 futures to confirm, we saw declines of 97 basis points on the 30th, 1.18 percent on November 4th, 1.14 percent on November 6th, and so on. The only two positive settlement dates were essentially flat.
Given that we’re about to see roughly $150 billion drained from the market during a low-volume holiday week, you have to look at this data and wonder what the next five to six trading days might look like. One could make a case for significant volatility and potentially a rough period over the Thanksgiving holiday, which is typically viewed as a bullish time of year. Many people may find this challenging because seasonality usually creates positive expectations. But more important than seasonality is understanding what is driving this behavior.
Why are we suddenly seeing large drawdowns on settlement dates? Seven out of nine declines is a high ratio, and with the smallest decline being 80 basis points, it’s hard to call this coincidence. The positive days were effectively flat. This suggests a meaningful pattern.
I’ve theorized why this could be happening, and I’ve shared more detail in the member area, but I want to outline the general idea here because it’s important for everyone to recognize this pattern and consider what it may mean.
The reverse repo facility has been effectively drained. This began after the debt ceiling agreement. The TGA added about $600 billion, rising from around $300 billion to more than $900 billion. The Treasury is targeting about $850 billion. During the TGA ramp-up, the reverse repo facility drained sharply. For a while, markets didn’t feel the full impact of Treasury issuance because excess cash in the reverse repo facility offset it. But once that cash was depleted, the impact began to hit risk assets.
A key warning sign was increased usage of the standing repo facility. We expected usage on September 30th because quarter-end typically brings overnight funding stress, but usage began rising again in mid-October — unexpectedly. At the same time, volatility increased in SOFR, the secured overnight financing rate. SOFR began drifting higher versus IOER, the rate the Fed pays banks on reserve balances. This was another sign of tightening conditions.
Once the reverse repo facility hit its lower bound and the TGA continued to rise, we began seeing reserve balances decline. When the TGA was effectively filled, settlements and payments started offsetting each other, and the need to finance Treasury issuance shifted toward risk assets. That is, liquidity was being pulled from markets like equities and Bitcoin.
Bitcoin peaked on October 8th. Interestingly, its earlier peak was on August 13th — which also corresponds to the date reverse repo balances fell below $50 billion. These relationships suggest that what we’re seeing in risk assets is directly tied to liquidity being pulled to fund government debt issuance.
T-bills have been largely responsible for draining the reverse repo facility. When T-bill issuance falls, the reverse repo facility rises. When issuance rises, the reverse repo facility drains. This pattern matches historical debt ceiling episodes. The connection to equities becomes clearer when looking at overnight funding markets.
DTCC data gives us insight into overnight funding rates and volumes. When Treasury financing volumes decline, excess liquidity appears to flow into equity repo financing. When Treasury volumes rise, liquidity is pulled away from equity repo financing. When equity repo financing volumes rise, equities tend to rise. When they fall, equities decline. Based on the data, equity repo financing could soon begin declining again, especially if Treasury volumes rise as expected.
In short, overnight funding stress is weighing heavily on the market. There is no longer enough liquidity to support equity valuations — or even cryptocurrency valuations. The roughly $2 trillion that had been sloshing around since 2021 is now gone.
If we continue to see large drawdowns on settlement days, then this liquidity-driven selling may persist for some time, especially given the enormous amount of debt issuance required to finance the deficit. This will continue until valuations align with available liquidity, or until the Fed eventually steps in to inject liquidity — whether through balance sheet stabilization or gradual balance sheet growth. The next Fed meeting isn’t until mid-December, and we’ll have many settlement dates between now and then.
The data suggests this is something we need to pay close attention to. Whether broader awareness changes the outcome remains to be seen. But price action in both equities and Bitcoin aligns with the liquidity trend.
Bitcoin, down nearly 30 percent, remains purely a liquidity and sentiment gauge. Anything that can fall 20 percent in a month is not a safe haven. I would rather put my money in a bank account than in something that volatile. Bitcoin is simply a risk asset on steroids.
If Bitcoin continues falling, risk assets likely continue falling. If volatility persists on settlement days — which we have many of in the next five trading sessions — then this analysis may hold. If the market rallies despite the settlement schedule, then this pattern may fade. We’ll see.
Have a great rest of your week, and we’ll see you soon.
