The Liquidity Drain That May Be Crushing Bitcoin and Risk Assets
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Key Takeaways
Treasury settlements are creating a measurable negative drag on equities: Since October 28, the S&P 500 has averaged a 40-basis-point daily decline on settlement dates versus a 25-basis-point gain on non-settlement dates, with cumulative returns of negative 12% versus positive 14%, respectively.
Higher-beta, risk-intensive assets are bearing the brunt of the liquidity drain: Bitcoin has posted a cumulative negative 47% return on settlement dates with only seven up days, while the Nasdaq has averaged negative 60 basis points daily — meanwhile, defensive sectors like Consumer Staples (XLP) show virtually no settlement-day weakness.
The liquidity drain is likely to persist through tax season: With roughly $160 billion drained since February 24 and continued heavy issuance ahead, settlement-driven pressure is expected to remain a dominant market feature until Treasury issuance slows or tax-season flows offer relief.
Video
Fully Edited Transcript By Claude
Heavy Settlement Calendar and the Liquidity Drain Thesis
This past week, we had a pretty heavy settlement calendar, and a lot of the data I’ve been trying to piece together has been showing that settlement dates have a negative bias on the stock market. On the 24th, we had $15 billion, $22 billion, and $37 billion in settlements — combined, roughly $74 billion drained over the past week.
This coming week, March 2nd to March 5th, we have another roughly $60 billion, $19 billion, and another $13 billion or so, which gives us about $92 billion this week. Cumulatively, that brings us to approximately $160 billion drained since February 24th. That’s a lot of cash being sucked out of the marketplace.
The Pine Script Study: Settlement Dates vs. Non-Settlement Dates
I’ve been working on a Pine Script that I developed using Quad and tested it with other AI engines. Essentially, what I’ve come up with shows that settlement dates have had a profound negative effect on the S&P 500 in particular — and much more so on other risk assets.
Since October 28th (which I’ll explain in a moment), we’ve had 32 settlement dates and 52 non-settlement dates. On settlement dates, the S&P 500 has seen an average daily decline of about 40 basis points versus a 25-basis-point increase on non-settlement dates. More importantly, cumulative returns have been roughly negative 12% on settlement dates versus positive 14% on non-settlement dates.
Additionally, the average up day on a settlement date has been about 42 basis points, while the average down day has been about negative 83 basis points. On non-settlement dates, returns on up days are around 55 basis points higher, and the average down day is only about negative 36 basis points.
What this implies is that settlement dates are having a bigger and more profound effect on equities.
Why October 28th?
One of the reasons I chose October 28th as the starting point was simply because it looks like around that time, the reverse repo facility really came in and started grinding at its lower bound. Of course, around month-ends and quarter-ends, you can see increased usage in the facility. But for the most part, if you just draw a line through it, you can make a case that it arced lower and then flattened out right around that date. That was really the basis of the choice.
I could have probably started a week or two before or after, and I don’t think it would have changed very much.
Nasdaq: An Even Worse Picture
When you look at the Nasdaq, the numbers are even more stark. On settlement dates, the Nasdaq has returned an average daily loss of negative 60 basis points, with cumulative returns of negative 17.4%. The average down day has been nearly negative 1.1% versus average up days of 71 basis points.
On non-settlement dates, the Nasdaq has gained about 31 basis points on average and has been up more than 50% of the time. Cumulative returns are positive 17%. The average up day is 75 basis points versus an average down day of only 68 basis points.
The spread between average down days and the difference in the frequency of up days between settlement and non-settlement dates is really striking.
Bitcoin: The Hardest Hit
This gets really interesting when you look at Bitcoin, and the numbers are pretty brutal. There have been only seven up days on settlement dates. The average daily return is negative 2%, and the cumulative return is negative 47%. On up days during settlement periods, Bitcoin goes up only about 90 basis points, while on average it declines about 2.7% on settlement dates.
On non-settlement dates (which also include weekends), Bitcoin is up about 50% of the time with positive cumulative returns of nearly 11%.
It’s also important to understand that in December — between mid-December and mid-January — Treasury wasn’t issuing as many bills. They were essentially paying down Treasuries, meaning they were issuing fewer than what was maturing. That was actually adding liquidity back into the market. During that period, Bitcoin was up about 13% and didn’t perform poorly at all.
As soon as settlements really started kicking off again, Bitcoin took a material turn lower. This implies that Bitcoin is one of the asset classes getting particularly hard-hit by the settlement drain.
The Tax Season Outlook
Based on what I estimate, tax season will continue to weigh on markets. Treasury settlements are going to be a dominant feature in the marketplace. It’s quite possible that getting through tax season will offer some relief. But at least for the time being, we’re likely to continue seeing Treasury settlement dates where issuance exceeds what’s maturing, essentially draining liquidity out of the market.
Sector-Level Breakdown: Where the Pain Is Concentrated
When you start breaking this down by sector, the picture becomes even more telling.
XLK (Technology): Cumulative returns are more negative on settlement dates than on non-settlement dates, and the average down day is nearly negative 1.7%.
Software: Also a pretty harsh number.
What this tells us is that settlement dates aren’t just having a negative impact broadly — they’re showing us how large the impact is in certain areas of the market.
XLP (Consumer Staples): Actually up on both settlement and non-settlement dates. You would not even know there was a settlement-date drawdown if you only looked at this sector.
XLI (Industrials): Cumulatively down, but not nearly as badly, and it has performed very well on up days.
XLU (Utilities): More down on settlement dates versus up on non-settlement dates. Utilities used to be a safe-haven area, but it’s become quite speculative with all the AI energy plays taking place.
XLV (Healthcare): A slightly weaker tone, but nothing dramatic.
What the Rotation Tells Us About How the Debt Is Being Financed
Not only does this data tell us about how settlement dates are affecting the market, but it also gives us a sense of how market participants are raising capital to pay for this debt. It looks like the higher-beta, riskier parts of the market are suffering much more than the “safer” parts.
HYG (High Yield Corporate Bonds): A pretty sharp contrast between settlement dates and non-settlement dates.
TLT (Long-Term Treasuries): Actually flipped — it seems to be somewhat immune to this phenomenon.
This points to the idea that the rotation taking place in the market is being driven, at least in part, by a liquidity drain. The financing of that drain is coming from the higher-beta, more risk-intensive parts of the marketplace.
RSP (Equal-Weight S&P 500): While clearly down on settlement dates, it’s up a lot more on non-settlement dates compared to the cap-weighted S&P 500, which is down much more on settlement dates.
IWM (Russell 2000): Not completely immune to the phenomenon. It’s fared better, but it’s still being somewhat negatively impacted by settlement-date issuance.
Caveats and Closing Thoughts
Of course, nothing is certain, and just because we have a settlement date doesn’t mean the market is going to go down. A third of the time, the market has actually been up. Just this week, on Tuesday, the S&P 500 rose 77 basis points on a settlement date. We’ve also seen the S&P up 10 basis points on another settlement day, which was well within the range of a typical settlement-date session — though there was a fairly large settlement on that day.
What this analysis really explains is an interesting way to think about how Treasury debt is being financed: riskier assets are being sold while there’s a rotation into safer asset classes. This is something I’ve been working on and trying to perfect. It’s probably not perfected yet, but I hope it will continue to be a useful framework going forward — and something to think about as we look for additional data points to refine the thesis.
Defined Terms and Jargon
Settlement Date: The day on which a Treasury security transaction is finalized and payment is exchanged — effectively the date when cash leaves the financial system to pay for newly issued government debt.
Basis Points (bps): A unit of measurement equal to one-hundredth of a percentage point (0.01%); used to describe changes in yields, returns, and interest rates.
Reverse Repo Facility (RRP): A Federal Reserve program where financial institutions lend cash to the Fed overnight in exchange for Treasury securities; when usage declines to a lower bound, it signals reduced excess liquidity in the system.
Cumulative Return: The total percentage gain or loss of an asset over a defined period, compounding all daily returns together rather than averaging them.
Higher Beta: Refers to assets or sectors with greater sensitivity to overall market movements, meaning they tend to amplify both gains and losses relative to the broader market.
Liquidity Drain: A reduction in the amount of available cash circulating in financial markets, often caused by government debt issuance pulling funds out of the system.
Cap-Weighted vs. Equal-Weighted: Cap-weighted indexes (like SPY) give larger companies proportionally more influence on returns, while equal-weighted indexes (like RSP) treat every stock the same — differences in their performance can reveal where gains or losses are concentrated.
Pine Script: A programming language native to TradingView used to create custom technical indicators, strategies, and alerts for charting and backtesting.
Disclaimer
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