Bank of America stated that a potential adjustment in the Federal Reserve’s holdings of U.S. Treasury securities could lead the central bank to purchase nearly $2 trillion in Treasury bills over the next two years, enabling it to absorb almost all of the Treasury’s issuance during that period.

Strategists Mark Cabana and Katie Craig expect the Fed to adjust its portfolio to better align assets and liabilities, a move that would mitigate interest rate risks and negative assets while shortening liability duration. This would ultimately provide the Treasury with much-needed relief. Since the debt ceiling was raised last month, the Treasury has issued a significant amount of short-term debt to cover widening deficits and replenish cash balances.

“If you look at parts of the Fed’s balance sheet, assuming mortgage reinvestments go into T-bills, the balance sheet rolls into T-bills, and the Fed shifts maturing Treasuries into T-bills, that number is about $1 trillion,” said Cabana, head of U.S. rates strategy at Bank of America, in a separate interview. “The Treasury issuing $1 trillion in T-bills and the Fed coincidentally buying all of it is a bit incredible. This is a new source of demand at the very front end of the curve.”

In a report on Friday, Bank of America strategists wrote that the Fed could shift nearly 50% of its assets into Treasury bills to match its short-term liabilities—primarily reserves and reverse repurchase agreements—and absorb changes in the Treasury’s cash balance. They project Treasury bill supply at $825 billion in fiscal 2026 and $1.067 trillion in fiscal 2027, assuming the Treasury maintains bill auction sizes unchanged until October 2026.

If the Fed takes this step, it would ensure sustained strong demand for short-term government debt, alleviating concerns that the Treasury’s heavy issuance could drain market liquidity.

The strategists noted that while the Fed is still engaged in quantitative tightening, recent remarks from policymakers suggest discussions about the portfolio could appear in the Federal Open Market Committee’s July meeting minutes, scheduled for release on August 20. Governor Christopher Waller has stated that the Fed is adopting this approach to ensure the “optimal structure.” A recent paper by a senior Fed adviser also advocated for such a policy.