Goldman Issues Market Alert As Up To 15% In Total Reserves Are Drained In Jun/Jul

We explained previously why the coming end of the melodramatic debt ceiling "crisis" (a Congressional vote is pending and the Freedom Caucus may well scuttle the McCarthy-Biden deal, but the resulting market plunge will only precipitate the inevitable), will in turn launch the start of the next banking sector crisis: in a nutshell, the liquidity drain from the coming Treasury cash rebuild (as the Treasury boosts its cash balance from $50 billion to $600 billion or more) will not only lead to an aggressive, derisking reserve drop that would be the equivalent of several rate hikes and hammer risk assets, but will also push regional banks to the liquidity brink once again as their deposits get transferred rapidly to money market funds and/or other large banks such as JPM, sparking the next banking crisis and yet another round of central bank interventions (for more see "Why The End Of The Debt Ceiling Crisis Triggers The Next $1.2 Trillion Banking Crisis").

Morgan Stanley agreed that the coming liquidity drain would have adverse consequences on the market, writing that "at a time of volatility in the banking system, this further drain of reserves could amplify the risks" and warning that "to the extent that investors other than money funds invested in the RRP facility also take down some of the new bills issuance, we will see another drain on bank reserves as the Treasury refills its coffers" (see "The Debt Ceiling Will Get Sorted Out, It's The Reserve Drain After That Will Hurt").

And now, it's Goldman's turn. As strategist Cecilia Pretus writes in the bank's weekly global liquidity update (always a must read, and always available to pro subscribers), after a big global liquidity boost since March - the one we described in January in "How The Coming Debt Ceiling Debacle Blew Up The Fed's QT, And What Happens Next" - Goldman is "concerned that liquidity could tighten significantly over June/July on combination of TGA build up, TLTRO repayments and QT, leading to a pick up in volatility and underperformance for risk assets in H2."