The Current Situation and Challenges of Short-Term Debt Auctions

Currently, with massive funds continuously flowing into U.S. money market funds—now totaling approximately $7.4 trillion—demand for the Treasury's increased issuance of short-term bills is expected to remain sufficient, at least in the near term.

However, for money market fund managers, a potential complication is the widespread expectation that the Federal Reserve may restart rate cuts as early as September.

When rate cuts are anticipated—as has been the case for months—funds tend to extend the weighted average maturity (WAM) of their holdings, favoring higher-yielding, longer-duration Treasury securities. According to Bank of America data, the WAM of government money market funds, which primarily invest in Treasury bills, repurchase agreements, and agency debt, has remained around 40 days since May, nearing historical highs.

Thus, Bank of America strategists Katie Craig and Mark Cabana argue that these funds may now have limited capacity to further extend maturities and absorb bill supplies with durations exceeding 1.5 months.

Peter Crane, president of Crane Data, however, sees no immediate reason to worry about a broad decline in money market funds' demand for Treasury bills, as even funds not exclusively invested in Treasuries use these securities to meet daily liquidity needs.

Regardless, most analysts expect the U.S. government to face substantial borrowing needs in the coming years, indicating that the Treasury will ultimately need to increase issuance across all maturities.

By tilting its debt issuance structure toward more short-term bills, the U.S. government can boost borrowing without pushing up long-term bond yields. Of course, this strategy carries risks due to the rapid turnover of short-term debt. Each time such debt matures (at least annually), new debt must be issued at prevailing rates. If rates rise, the Treasury's debt burden will grow heavier.

Data shows that as of June, Treasury bills accounted for about 20% of the U.S. Treasury market—precisely the average share level recommended last year by the Treasury Borrowing Advisory Committee for the long term.