Bitcoin Signals Tightening Liquidity Conditions

Stocks were flat on the day, finishing up just 2 bps. Overall, it was a bit of a snooze fest. The main takeaway is that tomorrow begins a nearly $150 billion liquidity drain, starting with $15 billion in T-bills settling, followed by $47 billion in coupon settlements on Friday, $68 billion on Monday, and another $16 billion in T-bill settlements on Tuesday. There should also be another T-bill settlement on June 4, in the roughly $5 billion to $15 billion range.

The point is that since the calendar flipped from paydowns to net issuance on May 12, the index has risen by around 1.8%. However, most of those gains came on May 13 and 14, with the index otherwise largely stalling around the 7,515 region.

Meanwhile, over that same period, Bitcoin is down roughly 7% to 8%. More importantly, it is sitting on support around $75,000, and a break below that level could set up a move towards $70,000. That is something worth watching because, in my experience, Bitcoin tends to be a better liquidity indicator than most other instruments. If the Treasury settlements are a drain on liquidity, then Bitcoin could be heading much lower.

In the meantime, the weighted average repo rate was 3.66% today, and I would expect SOFR to either remain flat or move higher again when tomorrow’s data arrive at 8 AM ET. As I have noted before, I think the sharp decline in SOFR was driven mostly by the Treasury’s bill paydowns, which likely created cheaper financing conditions as equity repo positioning surged over the past couple of weeks.

Unfortunately, equity repo activity data is delayed by about a week, making it difficult to track accurately in real time.

Otherwise, we can just wait to see how things go tomorrow.

-Mike

Glossary by ChatGPT

• Basis Point (bps) — One one-hundredth of a percentage point, commonly used to describe interest rate and yield changes.

• Coupon Settlement — The process where investors pay for newly issued Treasury notes or bonds that carry periodic interest payments.

• Equity Repo Positioning — Borrowing activity using equities as collateral in the repurchase agreement market.

• Liquidity Drain — A reduction in available cash or reserves within the financial system, often caused by Treasury issuance or central bank actions.

• Net Issuance — The amount of new debt issued after subtracting maturing securities or paydowns.

• Paydowns — The repayment or maturity of outstanding debt securities that returns cash to investors.

• Repo Rate — The interest rate charged in repurchase agreement transactions used for short-term funding.

• SOFR — The Secured Overnight Financing Rate, a benchmark interest rate based on overnight Treasury-backed borrowing transactions.

• T-bills — Short-term U.S. Treasury securities with maturities typically ranging from a few days to one year.

• Weighted Average Repo Rate — The average repo funding rate across transactions, weighted by transaction size.

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