As the U.S. government continues its borrowing spree, money-market funds are preparing for another wave of Treasury bill supply. Since June, these funds have already endured over $1.6 trillion in issuance, and now they need to make room for an additional $450 billion in the fourth quarter of the year.
Barclays strategist Joseph Abate predicts this colossal T-bill issuance based on the Treasury Department’s plan to have $750 billion in cash on deposit at the Federal Reserve by the end of December. Despite the heavy supply, Abate believes that the market will easily absorb it with little impact on prices.
One reason for this confidence is the significant inflows into money-market funds this year. Inflows into government funds alone have reached almost $4.7 billion out of a total of approximately $5.6 trillion in assets as of September. These record-breaking flows have helped bolster the funds’ capacity to absorb the influx of Treasury bills.
The surge in Treasury bill issuance since the U.S. debt-ceiling deal in June has had a notable effect on the composition of outstanding government debt. As of August, bills constituted about 22.4% of total government debt, the highest percentage since the COVID crisis. This exceeds the 15%-20% average observed since the 1980s.
Overall, despite the ongoing borrowing streak, money-market funds remain optimistic about their ability to handle this upcoming barrage of Treasury bill issuance.