Navigating the T-Bill Surge: Dealer Insights and Investment Strategies in a Post-Debt Ceiling World

The U.S. Treasury's post-debt ceiling resolution has unleashed a wave of T-bill issuance, setting the stage for a pivotal shift in short-term liquidity dynamics. As the Treasury General Account (TGA) is refilled to stabilize borrowing costs, dealer feedback underscores both opportunities and risks for investors. This analysis explores how the Treasury's issuance strategy could reshape money markets, yield curves, and liquidity premiums—and where investors should position themselves.

The T-Bill Supply Shock and Dealer Guidance

Following the $5tn debt limit increase in July 2025, the Treasury aims to replenish the TGA to $850bn from its trough of $370bn, requiring a T-bill issuance surge of $700–$1tn by year-end. Primary dealers, however, warn that the market's absorption capacity is finite. The Treasury Borrowing Advisory Committee (TBAC) has urged a 20% average T-bill share of outstanding debt while avoiding a drop below 15%, to prevent market dislocation.

The key trade-off is balancing issuance growth with liquidity needs. Dealers note that excessive supply could force short-term rates higher, as money market funds (MMFs) shift back from repos to T-bills. This reallocation—already underway—will drain banking system reserves and reduce reliance on the Fed's reverse repo facility (RRP), which saw $200bn in inflows during the T-bill shortage.

Liquidity Tightening and Its Implications

MMFs, which reduced T-bill allocations to 37% of assets by May 2025 (from 40% in late 2024), are now reallocating $300bn back into T-bills. This shift will tighten term funding conditions, pushing term repo rates higher, particularly for 90+ day tenors. The Fed's standing repo facility (SRF) is now a critical backstop, but its use has highlighted vulnerabilities in liquidity buffers.

Investors should monitor the T-bill/repo yield spread, which could widen if issuance outpaces absorption. A persistent spread above 20bp—a threshold breached during the 2023 debt ceiling crisis—signals elevated liquidity risk and a prime entry point for shorting T-bills against long-dated repos.

Risks of Over-Issuance: The “Shock Absorber” Test

T-bills are often termed the “shock absorber” of the Treasury market due to their deep liquidity. However, over-issuance risks undermining this role. Key risks include:
1. Liquidity Premium Spikes: A surge in T-bill supply could compress yields relative to longer-dated Treasuries, flattening the yield curve and raising demand for volatility products like T-bill futures options.
2. Debt Limit Volatility: The TBAC warns of renewed risks in early 2026, when the Treasury may again face borrowing constraints. This uncertainty creates a “wait-and-see” dynamic for institutional buyers.
3. Stablecoin Competition: With stablecoins projected to hit $2tn by 2028, their rising T-bill allocations (already $115bn) could displace traditional investors, amplifying volatility during periods of issuance peaks.

Strategic Opportunities: Capturing Yield Differentials

Investors can capitalize on the Treasury's issuance cycle through two core strategies:
1. Duration Ladders in Money Markets:
- Shorten maturities: Favor 13-week T-bills over 52-week bills, as the front end of the curve is most sensitive to liquidity strains.
- Hedge with inverse ETFs: Instruments like TBF (which short Treasuries) could profit from yield spikes if issuance overshoots demand.

1. Arbitrage in Repo Markets:
2. Borrow against T-bills at discount rates: Institutions can borrow at the Fed's SRF rate (4.5%) and invest in T-bills yielding 4.8%, locking in 30bp per annum.
3. Monitor RRP outflows: A decline in RRP balances below $150bn signals tightening liquidity—prompting a shift to cash equivalents.

Conclusion: Monitor the TGA, Not Just the Ticker

The Treasury's issuance strategy is a double-edged sword: it stabilizes borrowing costs but risks destabilizing short-term markets. Investors must track TGA levels, MMF allocations, and repo rate trends to navigate this landscape. A cautious approach—prioritizing liquidity and hedging against volatility—will be rewarded as the market absorbs the coming T-bill wave.

For now, the playbook is clear: shorten durations, hedge asymmetric risks, and stay agile. The Treasury's post-debt ceiling era is as much about managing market capacity as it is about financing deficits.