Key Highlights

• MMFs’ demand for T-bills is inelastic to supply; recent cuts to supply have led to a drop in buying
• When TGA gets rebuilt post-debt ceiling, bills will enter the market quickly, risking money market liquidity
• Foreign UST flows have returned since the end of April, but we don’t think the general selling trend is over

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What happens when bills supply picks up again?

EXHIBIT #1: INELASTIC MMF DEMAND FOR T-BILLS

_{Source: BNY Markets, U.S. Treasury, Office of Financial Research}

Between the February 18 and Friday last week, net T-bill issuance by the U.S. Treasury fell by nearly half a trillion dollars, a consequence of the debt ceiling having been reached at the beginning of the year. Through the end of April this year, money market mutual fund (MMF) holdings of bills had also fallen by around $370bn; we expect another drop to be reported in a few days when the end-May data are released.

Exhibit #1 shows relative supply (bill issuance) and demand (MMF allocations), revealing a nearly perfectly inelastic dynamic between the two. MMF asset allocations to bills correspond to issuance patterns. A few weeks ago, we argued that given reduced allocation by MMF to bills thanks to a lower T supply, more cash was finding its way from money funds into repo, keeping RRP balances elevated and repo generally flush with liquidity. 

The question to ask is what will happen once the debt ceiling is resolved, and the Treasury proceeds to ramp bill issuance back up to refill the Treasury General Account (TGA) and resupply the bills market? The Treasury’s most recent refunding document indicates that the TGA is expected to return to $850bn by the beginning of September, presumably after the debt ceiling process is behind us. The current level as of Thursday last week was $350bn, and in previous debt ceiling experiences which have gone up to – or close to – the eleventh hour, the TGA has dipped as low as under $100bn. If things reached that sort of level, we could be looking at a rapid refinancing of at least $700bn. 

As we have said and shown, MMF demand for bills appears to be inelastic to supply, so this suggests that there should, indeed, be a massive shift of these funds back into Treasury securities. The next obvious question under this scenario is: Do money markets become strained? Keep in mind that as the TGA gets replenished, system-wide reserves will drop. Currently at well over $3tn, reserves could dip below that level, creating a shortage of liquidity in the market.

We believe that this is one of the prime reasons that the Fed both curtailed QT back in March and why it is starting morning standing repo facility (SRF) operations in addition to its established afternoon openings. There is, of course, the possibility – remote in our opinion – that Treasury opts to run a smaller TGA, in contrast to the last refunding statement. 

Foreign UST flows: slight return

EXHIBIT #2: MOST SELLING USTS IN THE LAST 12 MONTHS

_{Source: BNY Markets, iFlow} 

We have been writing about cross-border flows into (or in many cases out of) U.S. Treasury securities for the better part of the last 12 months. During April’s “tariff tantrum,” we were particularly focused on this phenomenon and observed foreign selling of USTs seemingly across the board, as well as selling of other USD-denominated fixed income products (see here or here, for example).

A quick summary of our observations would show that while April – particularly the middle two weeks of the month – featured such outflows, and they were more intense than they had been over most of the previous 12 months, this was not a new development. We have seen UST selling by cross-border investors since mid-June of last year. Moreover, April 2025 was not the only episode of foreign outflows from the market; there were other pockets of intense Treasury selling during this period (see Exhibit #2).

Since the last week or so of April, however, UST buying from abroad has recovered, even as bond yields steadily rose during that period. Exhibit #3 shows the term structure of cross-border flows, indicating foreign demand at various maturities, from cash (CAST in our labeling scheme, or cash and short-term assets) out to over 10 years in maturity. In the month beginning on April 8, the light blue bars indicated selling of most maturities in the Treasury market. Note that the 10+-year sector of curve didn’t see such outflows during the month, indicating a relatively inelastic demand for very long dated paper – probably thanks to purchases by insurance companies, pension funds and other structural buyers of bonds. The rest of the curve didn’t see this buying – on the contrary, we witnessed generalized selling. However, in the past month (22 trading days, to be exact), cross-border flows returned with almost the same intensity as the selling during the previous 22 days. 

EXHIBIT #3: MAY RECOVERY IN CROSS-BORDER UST DEMAND

_{Source: BNY Markets, iFlow}

We don’t think this is the end of a trend of tepid or waning demand by overseas money for U.S. paper, but rather a normalization after the tariff tantrum. We see no reason for the year-long pattern of net selling to turn around, and we are concerned that the budget negotiations, which foresee a nontrivial amount of red ink, will crimp demand in the coming months. 

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