U.S. President Joe Biden signed the bill on the federal government’s debt ceiling and budget on June 3 local time, avoiding the U.S. government’s debt default, but at the same time limiting spending for the next two fiscal years.

With the new agreement officially taking effect, it is expected that the US Treasury Department will soon set off a new round of borrowing frenzy and issue new treasury bonds to fill the treasury. The first shot was Monday’s auction of US Treasury bonds worth more than $170 billion. According to some Wall Street estimates, by the end of the third quarter, the scale of new borrowing may expand to $1 trillion.

That’s when bank deposits will once again be raided to pay bills, exacerbating already fragile liquidity. So even Wall Street is warning that the market isn’t ready.

Earlier quantitative tightening by the Fed has eroded bank reserves, and money managers have been hoarding cash in anticipation of a recession looming. The influx of new government bonds will cause QT to “show off its power” again, which will intensify the impact on the stock and bond markets.

JPMorgan strategist Nikolaos Panigirtzoglou estimates that this shock is expected to cause a combined decline in stock and bond performance of nearly 5% this year. Citi macro strategists took a similar view, saying that after such a massive liquidity drawdown, the S&P 500 could see a 5.4% decline in two months and high-yield credit spreads would also take a 37 basis point hit.

Auctions starting Monday alone could have a domino effect across asset classes, shrinking liquidity again. From this, JPMorgan estimates that a broad measure of liquidity will fall by $1.1 trillion from about $25 trillion in early 2023. Coupled with the impact of the Federal Reserve’s interest rate hike, liquidity standards may decline at a rate of 6% per year, in sharp contrast to the annualized growth for most of the past decade. Panigirtzoglou says:

“Liquidity is draining massively, and we rarely see that. It’s only in a severe collapse like the Lehman crisis that you see a contraction like that.”