US Treasury "Liquidity Drain" Starts Again: Treasury Department Aggressively Issues Short-term Debt—Can Fragile AI Trading Withstand the Storm?

According to Zhitong Finance APP, as artificial intelligence (AI) trading faces significant challenges, another liquidity "drain" test triggered by Treasury issuance also appears poised to impact the entire US stock market.

Last week, the S&P 500 index fell about 2.7%, while the Nasdaq 100 index dropped an even steeper 4.9%. Both indices have now posted losses for four consecutive weeks. And for the upcoming week, the market is unlikely to catch a break—US Treasury is preemptively accumulating cash by issuing massive amounts of short-term Treasuries to prepare for the February debt ceiling deadline, a “draining” process that is simultaneously weighing on the most crowded tech and semiconductor trades.

It is reported that another round of intensive short-term Treasury bill (T-bill) issuance will again drain liquidity from the system, with a net issuance scheduled for November 10 totaling $3.42 billion, and another $2.3 billion on November 12—more than $5.7 billion in total, potentially casting a “cloud” over the semiconductor sector.

Since October 1, when net Treasury bill issuance resumed, the Nasdaq 100 has dropped by more than 10% in total, while the S&P 500 has fallen over 3%. But semiconductors have been hit the hardest: the VanEck Semiconductor ETF (SMH.US) fell more than 20%, and the SPDR Technology Select Sector ETF (XLK.US) also plunged over 15%. Historical data shows that during periods of intensive T-bill issuance—when the amount issued exceeds redemptions and cash flows out of the system—SMH typically experiences even heavier downward pressure.

Relevant statistics further confirm this pattern. According to Mott Capital Management, since October 28, 2025, the market has seen 70 “net issuance days” (new issues exceed redemptions) and 189 “non-net issuance trading days.” On Treasury settlement days, SMH only rose 35 times, with an average decline of 25 basis points; on non-settlement days, SMH rose 116 times, with an average gain of nearly 28 basis points.

Looking at this week's issuance calendar, semiconductor trading is unlikely to see an optimistic outlook. Mott Capital Management's analysis suggests that related volatility may continue into early December—at which point T-bill settlements are expected to slow and shift into a “paydown” phase (maturity exceeds issuance and cash returns to the system), which would benefit the sector and the broader market. However, the real test may be further out. The US Treasury’s latest quarterly financing announcement indicates that the Treasury General Account (TGA) balance is projected to reach $1 trillion by the end of March 2027, up from the expected $850 billion level at December 31. The Treasury also announced that it plans to borrow $800 billion in the January-March quarter, significantly more than the $618 billion in the October-December quarter.

Assuming coupon-bearing debt remains stable, the Treasury's presentation to the Borrowing Advisory Committee (TBAC) shows nearly all—or even more than all—of the new borrowing will come from T-bills. Issuance is set to soar from $332 billion to $532 billion, more than $100 billion above the July-September level of $427 billion. This means that the first quarter of 2027 may become the most “challenging” quarter for this sector and the entire market.

A deeper concern is that the source of liquidity has quietly changed. Over the past year, as reverse repo balances have plummeted to near zero, the excess liquidity that used to reside in money market accounts and absorb Treasury issuance has been depleted. Now, it appears liquidity is being drawn directly out of the market—and with considerable T-bill issuance still ahead, this draining process is likely to continue.

Of course, there could be changes to the situation. Mott Capital Management points out that if the Federal Reserve restarts its reserve management program—buying T-bills outside of routine operations as it did last year—the market impact could shift. But for now, the marginal effect of a year of intensive bill issuance is significant and warrants continued close monitoring.

At the same time, the US stock market's underlying rebound momentum appears fragile. Mott Capital Management notes that last Friday, despite technical conditions ripe for a rebound, stocks did not rally as expected. This Monday may offer another window for a rebound—the 1-day VIX closed near 29 last Friday. If Monday does not see a rebound, this would mean the market failed to rise for a second consecutive “should-have-but-didn't” session, which is a decidedly negative signal.

Currently, the S&P 500 is in a negative Gamma zone, with the put option wall at 7,300 points, and even the net Delta estimate may have turned negative—something last seen at the end of March this year. In a negative Gamma environment, dealers' hedging amplifies price swings, creating a self-reinforcing “down accelerates the drop, up accelerates the rise” effect. With such high volatility and a sharp expected fall in short-term volatility Monday morning, a failed rebound would be a major negative for the market.

The bearish signals emerging from the options market are also cause for caution. Some analysts point out that bearish sentiment in the options market is now "at a level not seen or recalled since spring." A sentiment heat map tracking the top 50 index components shows a dramatic shift within a few weeks, with more stocks showing elevated put skew and higher implied volatility.

As more than $5.7 billion in net T-bill issuance continues draining market liquidity, this week's CPI report is expected to be the biggest variable—a hotter reading could push the Federal Reserve further into hawkish territory and tighten financial conditions, replaying the logic of 2022. With tightening liquidity combining with stricter financial conditions, even the hottest AI trading frenzy may struggle to withstand the pressure.

Debt Ceiling to Be Hit in February, Treasury Issue Short-Term Debt in Advance

In fact, all these risks stem from the imminent approach of the US debt ceiling. Wall Street strategists are preparing for the Treasury to hit its borrowing ceiling as early as next February, triggering so-called “extraordinary measures” before a refinancing crisis emerges by the end of 2027. Institutions such as Bank of America, Barclays, and Morgan Stanley note that the Treasury’s latest funding estimates, coupled with a higher cash balance, bring forward the debt ceiling timeline to mid-late February—Bank of America previously estimated May.

Currently, the US government is less than $800 billion from its $41.1 trillion borrowing cap. Analysts believe the higher cash balance reflects a growing reliance on Treasury bills to fund government spending and deficits; because bill issuance creates greater and more frequent cash outflows within a month, officials usually need to maintain a larger buffer, which in turn quickly consumes the remaining borrowing capacity.

Unless Congress agrees to raise or suspend the debt ceiling, the Treasury can use unconventional accounting measures to avoid default, which are expected to provide an additional $300-350 billion in space.

However, several institutions have different predictions for the so-called “X-date”—when the Treasury runs out of cash and extraordinary measures, unable to meet all payment obligations: Bank of America estimates November 2027, but sees a risk zone in August; Barclays’ base case is late August to early September, but the timing is highly dependent on September’s tax receipts—a strong tax season could stretch to October; Morgan Stanley expects the end of Q3, with additional coupon auctions delayed until November; SMBC Nikko Securities anticipates that after borrowing powers rebound in April and May, extraordinary measures may only be used in June, with cash running out in September or October.

Debt ceiling constraints often trigger chain reactions in funding markets. When the Treasury starts drawing down its cash balance and cutting T-bill issuance, it may temporarily boost bank reserves and push overnight funding rates lower, but once the limit is resolved, the effect usually reverses—the Treasury ramps up bill issuance to “refill the coffers,” draining reserves and pushing up funding costs.

The long-standing deadlock between the two US parties could also disrupt segments of the yield curve: in previous showdowns, investors dumped Treasuries maturing near the “ceiling” date and instead bought those maturing before or after, creating a “kink” on the curve. For now, however, the T-bill curve shows no signs of concern, as the deadline is still months away.

Democrats’ success in the Congressional elections, however, increases the likelihood of a prolonged standoff with President Trump over fiscal borrowing issues. Fitch Ratings warned last month that unless the outgoing GOP-led Congress raises or suspends the debt ceiling before its term ends, such outcomes would increase the odds of “brinkmanship.”

Barclays strategist Samuel Earl said bluntly in a client note last Friday that, given the potential impact of the debt ceiling on money markets next year, “in the coming weeks we will closely monitor the progress of the reconciliation process.”