US Treasury Bill Issuance is Rising: What Liquidity Investors Need to Know
Key Takeaways
Why is the Treasury issuing more bills and how has the market reacted?
Each quarter, the US Treasury releases its quarterly refunding statement, which gives the market guidance on what level of T-bill supply to expect. In its most recent statement,1 the Treasury indicated it expects to borrow $739 billion in Q3 2026, which is $68 billion greater than the amount announced in May 2026.
Demand for T-bills rose as well in August as T-bill supply increased, likely due to a few factors. For one, some MMF portfolio managers deployed significant cash out of overnight repurchase agreements (repo) further out the curve immediately following the July Federal Open Market Committee (FOMC) meeting, which left rates unchanged and which markets interpreted as dovish. Additionally, reserve management purchases added $10 billion of demand per month over the summer, which may have helped contain rates.2
Beyond the traditional buyers, non-traditional participants such as hedge funds also stepped up T-bill purchases to de-risk as the sustained conflict in the Middle East contributed to continued volatile market conditions.3
How and why did the Treasury intervene in the bond market?
Following its quarterly refunding statement in early August, the Treasury announced on August 19 that it would be “at least doubling” the maximum size of its routine 10- to 30-year bond buyback operations, surprising markets. When the actual size of the buybacks was announced on September 9, the Treasury indicated that it could buy up to $6 billion. The Treasury categorizes these buybacks as designed to support market liquidity and to improve trading conditions of off-the-run securities (government securities that are not the most recently issued).4,5 Historically, bill issuance has funded these operations, meaning that increases to the amount in buybacks at the long end will likely result in greater issuance at the front end of the curve.
As a result of the Treasury’s announcement, standard operations will now have a maximum size of $6 billion, triple the $2 billion limit prior to the announcement.6 Based on the current schedule, we expect this to affect seven operations between the date of announcement and November 4, totaling $42 billion, which we expect will be funded by the same amount in T-bill issuance. While buybacks funded via shorter issuance do not change the outstanding amount of debt or liquidity in the banking system, they will reduce the amount of aggregate duration that the market will need to absorb.
What are the implications of the Treasury’s actions on money market funds?
The Treasury’s plan likely will be unsuccessful in lowering yields in the long term, as many see the rise in the long end as a product of macro and fiscal factors. These include an increased pace of debt issuance, strong economic growth from technology companies, continued concerns about fiscal policy in the US, global pressures on duration more broadly, and macro uncertainty and concerns around “de-dollarization.” However, we expect the increase in T-bill issuance to positively affect MMFs for the following reasons:
- Elevated T-bill supply in the absence of equivalent demand tends to push yields higher: An increased supply of T-bills tends to push yields higher as prices are lowered to attract buyers. While demand saw modest change in August, supply is expected to remain elevated, which in our view leaves more room for potential swings in yield.
- Increased supply at the front end allows MMF managers greater flexibility in portfolio positioning: Greater supply of T-bills may create potential opportunities for portfolio managers to express their views on the Federal Reserve, macro environment, and the forward rate path by purchasing securities that, in their view, may help capture yield premiums.
- More supply will also likely affect short-term funding markets: This effect will likely be seen via higher-yielding floating-rate notes and upward pressure on the Secured Overnight Financing Rate (SOFR), a measure of the cost of borrowing cash overnight. Normally, SOFR trades in line with the effective federal funds rate, but we expect elevated bill issuance to cause SOFR to trade at a premium, as higher yields on bills potentially draw cash out of repo, pressuring SOFR higher. Those lending cash in front-end markets may earn a higher yield given the additional supply coupled with a greater amount of tightening priced for the path of Fed policy.
Macro vs. micro impact on liquidity investors
The FOMC’s decision on September 16 to tighten policy by 25 bps amplified the higher rate impulses from increased supply (new federal funds target rate range 3.75%–4.00%). Forward curves are now pricing an additional three 25 bps upward moves from the FOMC by June 2027.7 This has put further upward pressure across the T-bill curve as markets are now anticipating the FOMC to remain active over the course of the next nine months. We believe the combination of greater supply and volatility around Fed expectations could create potential opportunities for MMFs to differentiate depending on their outlook.
1 US Department of the Treasury. As of August 3, 2026.
2 Federal Reserve Board. As of July 10, 2026.
3 Bloomberg. As of June 24, 2026.
4 US Department of the Treasury. As of August 19, 2026
5 Reuters. As of September 9, 2026.
6 US Department of the Treasury. As of September 10, 2026.
7 Bloomberg. As of September 2026.
