Key Highlights

• Robust tax collections have combined with more extraordinary measures to provide debt ceiling relief.
• T-bill supply has been falling YTD but is expected to ramp up and meet strong investor demand after the debt ceiling is resolved
• There has been a small respite in foreign selling of U.S. Treasurys last week, but we haven’t seen a full recovery in overseas demand.

X-date Likely in Late Summer

EXHIBIT #1:  BUILDING A BUFFER

_{Source: BNY Markets, U.S. Treasury, Bloomberg}

Between April 1, 2025 and April 21, 2025, the Treasury General Account (TGA) swelled by almost $300bn thanks to 2024 U.S. income tax receipts. This has helped boost the overall TGA to $563bn, up from a recent low on April 4 of $291bn. Furthermore, additional monies have been added to Treasury’s pool of “extraordinary measures” to leave well over $150bn on hand. Combined, the U.S. has just under $750bn in cash on hand while we await Congressional action on the debt ceiling. We think this gives enough headroom to avoid running out of funds until at least late summer, the so-called “X-date.”

With Congress back in Washington, the budget reconciliation process will begin in earnest. Congress has passed a budget resolution outlining the contours of taxing and spending already, which includes an extension to the debt ceiling. By moving the fiscal package through the legislature via reconciliation, Republicans, who narrowly control the House and have a slight majority in the Senate, are aiming to pass it without Democratic support.

This still leaves many details to be outlined. Agreements must be made between the House and the Senate as well as with the administration. The President’s team and Congressional leaders will begin to sit down to hammer out precise measures in the overall package. 

Forward look

As it stands, there should be plenty of time to pass a budget, including the debt ceiling, before the X-date. However, if the timeline slips for the overall spending package, the debt ceiling provision may have to be addressed on a stand-alone basis. This puts its passage in a bit more of a gray zone. If even a few Republicans in the house balk at authorizing an increase in the ceiling, leadership could be forced to seek some Democratic votes to pass the extension legislation, setting off a fraught negotiating period and raising market tensions as the X-date draws closer.

Right now, markets seem somewhat relaxed about the debt ceiling, with the T-bill curve not reflecting kinks or breaks in pricing for bills coming due in late summer. We expect this relaxed attitude to persist unless and until difficulty is encountered in the negotiations, which we are monitoring. 

T-bill supply continues to be cut, but demand will be there when it’s resumed

As a result of binding the debt ceiling earlier in the year, Treasury has cut T-bill issuance significantly. Net issuance by Treasury has fallen by over $21bn since the end of 2024. Once the debt ceiling is addressed, we expect a quick rebound in short-term debt offered to the public. For comparison, in 2023, during the last debt ceiling episode between February and the end of May, net bills were cut by over $100bn. After the debt ceiling was finally suspended in early June, Treasury fully reversed the decline in T-bill supply by early September, issuing an almost identical $100bn over the three-month period.

Forward look

There should be no shortage of buyer of new bills. Our iFlow data suggest demand by investors is inelastic to changes in supply. Exhibit #2 shows the rolling 20-day (i.e., approximately one month) sum of net bill supply against the rolling 20-day average of flows into the very front end of the curve (0–1y). Real money responds to fluctuations in T-bill issuance quite quickly. 

EXHIBIT #2: INELASTIC DEMAND FOR EXOGENOUS SUPPLY

_{Source: BNY Markets, U.S. Treasury Department, iFlow}

As discussed above, the debt ceiling and budget negotiations are about to intensify. As long as the debt ceiling remains binding, we expect further cuts. This will force investors into cash and money market mutual funds, where holdings hit a fresh record in early April, likely offering cash in repo markets and continuing to make use of the Fed’s overnight reverse repo facility. 

Checking in on cross-border UST flows: Outflows decelerate

In the week after “Liberation Day” on April 2, 2025, when broad-based tariffs were announced by President Trump, we saw 10y yields reaching nearly 4.5%, a 50bp increase from initial levels on the day of the announcement. Foreign real money was a heavy seller of USTs during this period (see here), and much was made about the possibility of foreign investor flight out of U.S. assets.

Last week featured calmer markets, giving us a chance to examine our iFlow data on cross-border U.S. sovereign bond flows in a less noisy environment than that which prevailed in the first few weeks of April. The most recent data from last week confirm that cross-border investors have moderated their selling of U.S. Treasurys. Three out of five days last week saw positive inflow after consecutive outflows between April 7–18, 2025.

Exhibit #3 shows a smoothed, rolling 20-day average of cross-border flows into the Treasury market. We see it nudging a bit higher – although still negative – in recent days. This is in an overall context of nearly constant selling since mid-2024. There are three brief peaks in overseas demand, but the rest of the period since last summer has seen pervasive outflows, including, the immediate post-April 2, 2025 period. The average outflow for the 12-month period shown is -0.03, but after July 1, 2025 it declines to -0.06.

EXHIBIT #3: DECELERATING CROSS-BORDER OUTFLOWS

_{Source: BNY Markets, iFlow}

Forward look

Foreign investor demand has been weakening for a while now and is something we have watched closely. A slowdown in outflows is a positive development in a market context that is questioning U.S. assets’ safe haven properties. However, until we see a sustained return of positive inflows, we remain wary that investor demand from abroad is slowly deteriorating.