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We may be leaving the calm before the bond market storm, with turbulence likely in the weeks and months ahead. What could trigger the next big move? One powerful catalyst may be the US Treasury’s checking account at the Federal Reserve. The last two times the Treasury replenished its coffers, risk assets suffered—potentially warning us of a bumpy road ahead.

Shown below is the Treasury’s cash balance at the Fed, known as the Treasury General Account (TGA), which is used to pay the government’s bills. After the COVID-19 pandemic, the TGA surged to unprecedented levels as the government issued more debt than it needed. In 2021, the Treasury scaled back new debt issuance while spending down its excess cash.

Source: Bloomberg, Financial Sense Wealth Management

Treasury Bill Market Disruptions

This decline in new Treasury issuance, especially T-bills (short-term Treasury debt maturing in four to 52 weeks), caused significant disruptions. Demand for short-term T-bills like the 3-month far outstripped supply, driving yields into negative territory in March and May 2021. This coincided with the TGA plunging from over $1.8 trillion in late 2020 to almost zero by October 2021.

Follow The Money

With a shortage of safe securities, money market funds and other institutions shifted from buying T-bills to parking cash in the Fed’s overnight reverse repo facility. As short-term T-bill rates turned negative in March 2021, funds moved rapidly to the Fed, with the reverse repo facility swelling from nearly zero to over $1.7 trillion by mid-2022.

While most Fed watchers focus on the asset side of the balance sheet, such as mortgage-backed securities or Treasuries during quantitative easing (QE), it’s important to also watch the liability side during quantitative tightening (QT). When the government draws down the TGA, it injects money into the economy and markets, providing stimulus and liquidity that tends to boost stock prices and economic activity.

You can see this relationship below—TGA (inverted, green) and the S&P 500 (black). The major TGA drawdown from 2020 to late 2021 propelled the S&P 500 higher, but as the TGA was depleted, the market peaked.

Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Liquidity Drains and Market Peaks

When the TGA is spent down, liquidity enters the financial system. When it’s refilled, the opposite happens: the government issues new debt, pulling cash from the private sector and draining liquidity.

In late 2021, a massive surge in new debt issuance pushed the TGA from zero to nearly $1 trillion by April 2022—a “reverse QE” event that drained cash from markets. This liquidity drain contributed to a sharp 23% drop in the S&P 500 from January to June 2022.

Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Recoveries on Fresh Spending

As in 2020-2021, when the newly raised cash in the TGA began to be spent, the market stabilized and ultimately bottomed in October, then rallied. About $300 billion was drained from the TGA to support markets during the bottoming process from June through October, and another $600 billion was spent over the next six months going into 2023, fueling a stock market recovery.

Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

The Liquidity Yo-Yo: 2023 and Beyond

This liquidity yo-yo returned in 2023. By June, the TGA was again drawn down to zero, and the Treasury issued a new wave of securities. The TGA soared from nothing to over $800 billion between June and October, draining liquidity and contributing to a market decline of just over 10% in Q3 2023. Only after the TGA peaked in October and stopped draining money did stocks find their footing and recover.

Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Recent Treasury Moves

Since late 2023, the TGA has not been drained to zero again because the debt ceiling was suspended until after the 2024 elections, enabling unrestrained government spending. Now, with the debt ceiling back in force, the Treasury cannot issue new debt above the limit and has started drawing down the TGA, dropping it from $850 billion in February to $250 billion in April, before taxes briefly boosted it back to nearly $700 billion.

In the last six weeks, the Treasury has injected over $400 billion into the financial system. Recent quarterly tax payments brought the TGA up to $446 billion, which must be spent before Congress goes on recess in August.

Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Policy Gridlock and What Comes Next

Trump’s “big, beautiful bill” has passed the House but faces opposition in the Senate. Most Democrats oppose cuts to Medicaid, food stamps, and green energy, while some Republicans argue the bill doesn’t cut spending enough and raises the debt ceiling too much. With the Senate divided, Congress may go down to the wire before recess.

Until then, $446 billion in TGA liquidity could help keep markets afloat through July. The real concern is what happens after the debt ceiling is raised: a third wave of government debt could hit markets, just as previous waves triggered declines of over 20% in 2022 and 10% in 2023.

The Link Between the TGA and Stock Market Declines

The first “tsunami” of government debt issuance, from late 2021 to May 2022, swelled the TGA from zero to nearly $1 trillion. Basic economics applies: when supply surges past demand, prices drop. Long-term US Treasuries fell over 30% during this period, and as bond prices fell, interest rates soared. The TGA (green line) and 10-year US Treasury yield below show the TGA rising from zero to nearly $1 trillion while the 10-year jumped from 1.5% to 3.5%—the sharpest six-month rise in over 50 years.

Source: Bloomberg, Financial Sense Wealth Management

Financial markets can adapt to gradual changes, but sudden shocks—like rapid spikes in rates or oil—are disruptive. In 2022, in addition to the biggest spike in rates in half a century, oil prices more than doubled after Russia’s invasion of Ukraine, contributing to a 23% drop in the S&P 500 in the first half of 2022.

The same pattern played out in 2023. The TGA swelled from near zero to just under $900 billion from June through October, the 10-year yield jumped from 3.4% to nearly 5%, and the S&P 500 corrected by just over 10%.

Source: Bloomberg, Financial Sense Wealth Management

You Go, We Go: Global Bond Interconnections

In the film Backdraft, Kurt Russell’s character says, “You go, we go”—a fitting metaphor for global bond markets, where sovereign yields in developed nations tend to move together, even if at different speeds. US, European, UK, and Japanese yields all surged from 2021 to 2023, but since then, only Japan’s have kept rising.

Source: Bloomberg, Financial Sense Wealth Management

Japan, after the US, has the world’s second-largest sovereign debt market, just under $9 trillion. Its 30-year yield has surged to a record high above 3%, putting strain on government finances. Japan’s debt-to-GDP ratio stands at 231%—the highest among developed nations, compared to 128% for the US.

Source: Bloomberg, Financial Sense Wealth Management

Japanese yields have already broken above the highs of 2023 seen in other developed markets and will likely keep pressuring global long-term rates. Once the US raises its debt ceiling and resumes large-scale issuance, the combination of rising Japanese yields and new US Treasury supply could deliver a one-two punch to global bond markets and rattle stocks worldwide.

Geopolitical Risks: Oil as a Wild Card

Compounding these pressures, 2022’s steep rise in yields and falling stocks was accompanied by a geopolitical shock as Russia’s invasion of Ukraine doubled oil prices. Today, we face another potential oil shock as tensions between Israel and Iran threaten global supply. The Strait of Hormuz, through which 20% of global oil passes, remains a key chokepoint; any disruption would send oil prices soaring and strain the global economy.

The Next Move: Calm Before the Storm?

The relative calm of the last two years appears to be ending. US long-term yields are coiling for their next big move, with higher Japanese rates and looming US debt issuance likely to push yields even higher. On the bullish side for bonds, cracks are showing in the labor market—weakening job growth and rising unemployment claims. If the economy falters and inflation cools, yields could fall, easing the government’s debt burden.

As shown in the following charts, the 10-year yield is coiling. A move above 4.75% and then 5% would confirm a breakout higher, while a drop below 4.25% or 4% would remove that risk.

Source: Bloomberg, Financial Sense Wealth Management

For the 30-year Treasury yield, the key threshold is just above 5%, which has repeatedly acted as resistance. A rising trend of higher lows is converging with this resistance, pointing to a decisive move in yields soon.

Source: Bloomberg, Financial Sense Wealth Management

Conclusion

Although investors might prefer to take a break from watching the markets over the summer, this could actually be a period when heightened attention is needed. Momentum is building in the bond market, and this could have significant financial and economic consequences—we may be experiencing the calm before the bond market storm.

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