The U.S. government shutdown has officially entered a record-breaking 36th day.

In the past two days, global financial markets have plummeted. The Nasdaq, Bitcoin, tech stocks, the Nikkei index, and even safe-haven assets like U.S. Treasuries and gold have not been spared.

Panic in the markets is spreading, while politicians in Washington continue to squabble over the budget. Is there a connection between the U.S. government shutdown and the decline in global financial markets? The answer is beginning to emerge.

This is not an ordinary market correction, but a liquidity crisis triggered by the government shutdown. When fiscal spending is frozen, hundreds of billions of dollars are locked in Treasury accounts and cannot flow into the market, cutting off the blood circulation of the financial system.

The "real culprit" behind the decline: The Treasury's "black hole"

The U.S. Treasury General Account (TGA) can be understood as the central checking account of the U.S. government at the Federal Reserve. All federal revenues, whether from taxes or the issuance of government bonds, are deposited into this account.

All government expenditures, from paying civil servant salaries to defense spending, are also drawn from this account.

Under normal circumstances, the TGA acts as a transit station for funds, maintaining a dynamic balance. The Treasury collects money and then quickly spends it, allowing funds to flow into the private financial system, turning into bank reserves and providing liquidity to the market.

The government shutdown has disrupted this cycle. The Treasury continues to collect money through taxes and bond issuance, and the TGA balance continues to grow. However, due to Congress not approving the budget, most government departments are closed, and the Treasury cannot spend as planned. The TGA has become a financial black hole that only takes in funds.

Since the shutdown began on October 10, 2025, the TGA balance has ballooned from about $800 billion to over $1 trillion by October 30. In just 20 days, more than $200 billion has been siphoned from the market and locked in the Federal Reserve's vault.

U.S. government's TGA balance | Source: MicroMacro

Analysts point out that the government shutdown has withdrawn nearly $700 billion in liquidity from the market within a month. This effect is comparable to the Federal Reserve conducting multiple rounds of interest rate hikes or accelerating quantitative tightening.

As the bank system's reserves are heavily siphoned by the TGA, both the ability and willingness of banks to lend have significantly decreased, causing the cost of funds in the market to soar.

The first to feel the chill are always those assets most sensitive to liquidity. The cryptocurrency market plummeted on October 11, the day after the shutdown began, with a liquidation scale approaching $20 billion. This week, tech stocks are also teetering, with the Nasdaq index falling 1.7% on Tuesday, and Meta and Microsoft experiencing significant drops after their earnings reports.

The decline in global financial markets is the most direct manifestation of this invisible tightening.

The system is "running a fever"

The TGA is the "cause" of the liquidity crisis, while the soaring overnight borrowing rates are the most direct symptom of the financial system "running a fever."

The overnight borrowing market is where banks lend short-term funds to each other, serving as the capillaries of the entire financial system. Its interest rate is the most accurate indicator of the tightness of interbank "money roots." When liquidity is abundant, banks can easily borrow from each other, and rates remain stable. But when liquidity is drained, banks start to run short of funds and are willing to pay a higher price to borrow overnight.

Two key indicators clearly show how severe this fever is:

The first indicator is the SOFR (Secured Overnight Financing Rate). On October 31, SOFR surged to 4.22%, marking the largest daily increase in a year.

This not only exceeds the Federal Reserve's upper limit of the federal funds rate of 4.00%, but is also 32 basis points higher than the effective federal funds rate, reaching its highest point since the market crisis in March 2020. The actual borrowing costs in the interbank market have spiraled out of control, far exceeding the central bank's policy rate.

Secured Overnight Financing Rate (SOFR) index | Source: Federal Reserve Bank of New York

The second, even more astonishing indicator is the usage of the Fed's SRF (Standing Repo Facility). The SRF is an emergency liquidity tool provided by the Federal Reserve for banks, allowing them to pledge high-quality bonds to obtain cash when they cannot borrow in the market.

On October 31, the usage of the SRF soared to $50.35 billion, setting a record high since the pandemic crisis in March 2020. The banking system is facing a severe dollar shortage and has had to knock on the last door of help from the Federal Reserve.

Standing Repo Facility (SRF) usage | Source: Federal Reserve Bank of New York

The high fever in the financial system is transmitting pressure to the weak links in the real economy, igniting long-hidden debt landmines. The two most dangerous areas currently are commercial real estate and auto loans.

According to research firm Trepp, the default rate on U.S. office CMBS (Commercial Mortgage-Backed Securities) reached 11.8% in October 2025, not only setting a historical high but also exceeding the peak of 10.3% during the 2008 financial crisis. In just three years, this figure has surged nearly tenfold from 1.8%.

Default rate on U.S. office CMBS | Source: Wolf Street

The Bravern Office Commons in Bellevue, Washington, is a typical case. This office building, once fully leased by Microsoft, was valued at $605 million in 2020. Now, following Microsoft's departure, its valuation has plummeted by 56% to $268 million and has entered default proceedings.

This is the most severe commercial real estate crisis since 2008, spreading systemic risk throughout the financial system via regional banks, real estate investment trusts (REITs), and pension funds.

On the consumer side, alarms have also been raised for auto loans. The average price of new cars has soared to over $50,000, with subprime borrowers facing loan rates as high as 18-20%, leading to an impending wave of defaults. As of September 2025, the default rate on subprime auto loans has approached 10%, and the overall delinquency rate on auto loans has increased by over 50% in the past 15 years.

Under the pressure of high interest rates and high inflation, the financial situation of American lower-income consumers is rapidly deteriorating.

From the invisible tightening of the TGA to the systemic fever of overnight rates, and then to the debt explosions in commercial real estate and auto loans, a clear chain of crisis transmission has emerged. The fuse unexpectedly ignited by the political deadlock in Washington is detonating the structural weaknesses that have long existed within the U.S. economy.

How do traders view the future market?

In the face of this crisis, the market is caught in a huge divide. Traders stand at a crossroads, fiercely debating the future direction.

The pessimists represented by Mott Capital Management believe that the market is facing a liquidity shock comparable to the end of 2018. Bank reserves have fallen to dangerous levels, resembling the situation during the Fed's balance sheet reduction that triggered market turmoil in 2018. As long as the government shutdown continues and the TGA continues to siphon liquidity, the market's pain will not end. The only hope lies in the quarterly refinancing announcement (QRA) from the Treasury on November 2. If the Treasury decides to lower the target balance of the TGA, it could release over $150 billion in liquidity to the market. But if the Treasury maintains or even raises the target, the market's winter will become even longer.

The optimists represented by well-known macro analyst Raoul Pal propose an intriguing theory of a "pain window." He acknowledges that the current market is in a painful window of liquidity tightening, but he firmly believes that a flood of liquidity will follow. In the next 12 months, the U.S. government has up to $10 trillion in debt that needs to be rolled over, forcing it to ensure market stability and liquidity.

31% of U.S. government debt (about $7 trillion) will mature in the next year, along with new debt issuance, potentially totaling $10 trillion | Source: Apollo Academy

Once the government shutdown ends, the suppressed hundreds of billions of dollars in fiscal spending will flood into the market, and the Fed's quantitative tightening (QT) will technically end, or even reverse.

To prepare for the midterm elections in 2026, the U.S. government will spare no effort to stimulate the economy, including interest rate cuts, relaxing bank regulations, and passing cryptocurrency legislation. With China and Japan also continuing to expand liquidity, the world will usher in a new round of monetary easing. The current pullback is merely a washout in a bull market, and the real strategy should be to buy on dips.

Mainstream institutions like Goldman Sachs and Citigroup hold a relatively neutral view. They generally expect the government shutdown to end within the next one to two weeks. Once the deadlock is broken, the massive cash locked in the TGA will be quickly released, alleviating the liquidity pressure in the market. However, the long-term direction still depends on the Treasury's QRA announcement and the Fed's subsequent policies.

History seems to repeat itself. Whether it was the balance sheet reduction panic in 2018 or the repo crisis in September 2019, both ultimately ended with the Fed's capitulation and re-injection of liquidity. This time, facing the dual pressures of political deadlock and economic risk, policymakers seem to have once again reached a familiar crossroads.

In the short term, the market's fate hangs on the whims of Washington politicians. But in the long term, the global economy appears to be trapped in a cycle of debt, monetary easing, and bubbles, unable to extricate itself.

This crisis unexpectedly triggered by the government shutdown may just be the prelude to a larger wave of liquidity surge to come.

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