LIVE MARKETS-US reliance on T-bills means easier financial conditions

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US RELIANCE ON T-BILLS MEANS EASIER FINANCIAL CONDITIONS

The United States government’s plan to continue to rely more on Treasury bills to fund its operations should provide a boost to markets with easier financial conditions as anticipated increases in the issuance of longer-dated debt are pushed back.

U.S. Treasury Secretary Scott Bessent said this week that it doesn’t make sense to increase long-term bond sales at current interest rates.

Analysts at Bank of America now expect that the U.S. Treasury will keep auction sizes of longer-dated debt steady through fiscal year 2027, after previously expecting increases would begin in February 2026.

The government will need to increase debt auction sizes across maturities to finance the expanding budget deficit.

But “versus the alternative of UST coupon growth, higher bills should mean lower rates, wider long-end swap spreads, and easier financial conditions all else equal,” BofA analysts Meghan Swiber, Mark Cabana and Katie Craig said in a report.

Bank of America estimates that increasing reliance on Treasury bills—short-term debt instruments with maturities of one year or less—could reduce the duration the markets need to absorb by approximately $1 trillion in 10-year equivalents and equates to around 30 basis points on the 10-year Treasury notes.

The strategy differs from quantitative easing, in which the Federal Reserve stimulates the economy by buying Treasuries, “but it has a similar fin condition impact,” the bank said.

A possible downside, however, will be that the increases in bill issuance raises the risk of creating funding pressures.

“Bill supply will be seasonally lumpy,” the analysts said, with supply likely peaking between July and November this year, and February and March next year. This risks “disrupting funding markets and requiring Fed intervention.”

(Karen Brettell)

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