For more than a decade investors operated in a world of abundant liquidity. Now that era is fading. The US is rolling over enormous amounts of short-term debt weekly because demand for long-term bonds has weakened. This has pushed its treasury towards heavy reliance on short-duration borrowing, which drains money from overnight funding markets and forces the government to hold a large cash cushion.
These moves may seem technical, yet they pull liquidity out of the system in a very real way. Repo markets tighten, bank reserves fall, funding conditions deteriorate and risk assets feel it long before the public does.
Bitcoin has reacted immediately. It tends to reflect global liquidity conditions faster than any other major asset. When liquidity contracts, bitcoin falls. When policymakers add liquidity, bitcoin rises. For now, the squeeze is winning.
Bond market’s weak point
The treasury market has its own quiet vulnerability. Over the last two years the largest marginal buyers of medium- and long-term US debt have not been foreign central banks or pensions. They have been hedge funds running leveraged basis trades. These funds borrow at the short end of the curve and use that funding to buy longer-dated bonds.
It works until volatility rises. When markets become unstable, these funds must reduce leverage. That process forces them to sell the very treasuries they have been supporting. This selling pushes yields higher and tightens liquidity further. It is a feedback loop that few legislators acknowledge, but it is a major concern for anyone who follows market structure closely.
Energy, tech and new inflation challenge
The financial picture is only one side of the story. The real economy is adding new pressure. US shale oil production, which helped contain global inflation for a decade, is flattening. Meanwhile, the AI industry is consuming electricity at a pace the grid cannot match. Many hyperscalers face multi-year delays before they can secure new power connections.
AI companies expect to invest trillions over the coming years. The US government also needs trillions to fund the deficit. The energy sector needs enormous reinvestment to avoid supply shortages. All of these demands draw from the same pool of capital. That overlap creates an inflationary undertow that rate cuts alone cannot solve.
Geopolitical shift in what counts as safe
Another significant shift is occurring in how countries think about reserves. The freezing of foreign exchange reserves during recent conflicts altered perceptions of what is truly safe. Many central banks have responded by increasing their gold holdings. Their reasoning is simple. Gold carries no counterparty risk. It cannot be frozen. And it exists outside the political reach of any single nation.
This is why gold has been firm even as liquidity tightens. Sovereigns are adjusting quietly but decisively.
Bitcoin’s role and the dollar’s strength
Bitcoin’s recent weakness has confused some people who expected the asset to thrive during geopolitical stress. Yet bitcoin is not a traditional haven. It is a liquidity-sensitive asset. When funding conditions tighten, investors lock in gains and raise cash. That usually means selling bitcoin first.
Gold, meanwhile, benefits from long-term reserve accumulation by central banks, which tends to be slow, deliberate and unaffected by short-term volatility.
The dollar remains strong not because conditions are healthy, but because global liquidity is scarce. When dollars are difficult to access, the currency appreciates even if the underlying economy is strained.
Markets will respond before politicians do. Bitcoin will react before gold. The dollar will stay firm until the squeeze becomes unsustainable. What happens next depends on when policymakers decide that stability matters more than restraint. Once they do, liquidity will return.
• Muchena is founder of Proudly Associated and author of ‘Artificial Intelligence Applied’ and ‘Tokenized Trillions’.
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