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The wall was at the top of the liquidity cliff. He dared the market to jump. Today it did. When the market is ready, a catalyst always appears. This time, it was tariffs and a weak jobs report that lit the match.
Will it have a great fall, or levitate once more?
We came to the long-awaited liquidity cliff in early July when Congress passed the OBUB. But the markets didn’t go over—until now. Maybe July 31 was the day the stock market finally took the leap. It’s too soon to say for sure, but this looks like the beginning of what I expected. Barring another buy-the-dip rally, we’re now seeing the first effects of the massive wave of Treasury supply draining liquidity from the system.
This report breaks down the Treasury’s projected issuance over the next 3 months and reviews whether the July supply tsunami had any real impact. Then it digs into the usual liquidity backstops—repo, RRP, margin, foreign buying—to find out what, if anything, is still holding up stock and bond prices.
The answer: nothing.
The Treasury basis trade isn’t expanding. Repo isn’t rising. The RRP slush fund is bleeding slowly. Treasury supply has exploded.
So why hasn’t the market cracked wide open yet? The only conclusion that fits: sentiment. Bullish, delusional, and feeding increased leverage. Margin debt surged through May—but that’s just the lagging residue of rising prices, not a leading signal. Prices drive margin, not the other way around.
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The liquidity cliff is here. Don’t fall off.