Following the increase in the US debt ceiling, it is expected that more than $1 trillion in short-term Treasury bonds will be issued in the next 18 months. With this move, the Treasury aims to both replenish its cash reserves and finance the growing budget deficit.
However, there does not appear to be a shortage of buyers for this increase in supply. Money market funds, which have a record $7.4 trillion in assets as of July 1, are ready to buy these new bonds by investing in low-risk and short-term assets.
Susan Hill, head of government liquidity at Federated Hermes, said, “Such a large supply may sound excessive, but we are prepared for it.” The debt ceiling was recently increased by $5 trillion to $41.1 trillion with the signing of the “One Big Beautiful Bill.” During the same period, the Treasury’s cash balance fell to $313 billion. Treasury Secretary Scott Bessent stated that increasing long-term bond sales was not logical given the current high interest rates, opting instead for short-term borrowing. J.P. Institutions such as Morgan, Barclays, and TD Securities predict that bond issuances alone will range from $900 billion to $1.6 trillion in the next 18 months. However, the amount of excess cash held in the Fed’s reverse repurchase agreement (RRP) program fell from $2.5 trillion at the end of 2022 to just $182 billion in July 2025. This raises questions about how money market funds will acquire the new bonds. Analysts suggest that funds will exit repurchase agreements and move into higher-yielding Treasury bonds. Currently, three-month Treasury bills yield 4.35%, while the repo rate is at 4.31%.Furthermore, the continued attractiveness of money market funds for investors means increased demand for T-bonds. Offering yields approximately 170 basis points higher than bank deposits, individual investors are shifting $10 trillion of their savings from banks to these funds.
While bond issuance is expected to be between $650 and $830 billion in the next five months, this year’s issuance is projected to surpass past debt ceiling crises. In 2023, $1.1 trillion worth of bonds were issued in just three months.
According to experts, this time the process is proceeding more controllably and the Treasury is in a stronger position with a cash surplus of $300 billion.
