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Debt ceiling resolution to lead to more US borrowings in

2025

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Issuance to focus on shorter-dated debt, impacting repo

rates

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Money market funds may absorb some Treasury supply

By Gertrude Chavez-Dreyfuss

BOSTON, June 24 (Reuters) - The bond market is bracing

for up to $1 trillion of additional U.S. Treasuries supply in

the second half of the year once lawmakers address the looming

debt ceiling problem, possibly permanently, top rates

strategists said on Tuesday.

Any new issuance will likely be focused on shorter-dated

debt including bills.

With the flood of Treasuries, market participants are left

to wonder: who is going to buy them all? Treasury issuance is

meant to address the U.S. government's huge fiscal deficit.

President Donald Trump's sweeping tax-cut and spending bill

would lead to a larger-than-expected $2.8 trillion increase in

the federal deficit over the decade, despite a boost to U.S.

economic output, the nonpartisan Congressional Budget Office

projected.

The U.S. Senate could vote on Friday on Republicans' tax and

spending measure, said Treasury Secretary Scott Bessent on

Tuesday, and he was confident the House would then pass that

version.

"We are just about to go through a level shift," said Mark

Cabana, head of U.S. rates strategy at BoFA Securities, during a

panel discussion on Tuesday at the Money Fund Symposium in

Boston. "You're going to see this big issuance clip and it's

coming within the next few months. You can debate exactly when

they raise the debt limit, but the X-date is coming soon."

Bessent had said that the so-called X-date when the government

would exhaust remaining borrowing capacity under the federal

debt ceiling would come sometime during the mid-to-late summer.

When the debt ceiling is reached the Treasury is unable to

increase borrowings, but if it is lifted or eliminated, the

government can then issue more debt.

Cabana's forecast is for new supply of Treasuries to hit $1

trillion by the end of the year. Gennadiy Goldberg, head of U.S.

rates strategy at TD Securities, also expects an increase of

nearly $1 trillion in issuance this year, with about $700

billion supply in August and September.

A surge in Treasury supply could increase repurchase, or

repo rates, which refer to the cost of borrowing short-term

cash using Treasuries or other debt securities as collateral.

Higher Treasury supply typically saturates the market with

additional collateral, which can initially lower repo rates due

to excess supply. However, if supply exceeds demand

substantially, it may lead to higher repo rates as lenders

demand more compensation for holding larger volumes of

securities.

Goldberg thinks this year's supply will be concentrated on

the front end of the Treasury curve - the two-year to the

seven-year sector.

"Our expectation is that the Treasury keeps issuance

focused on the very front end of the curve in terms of coupons.

We're not expecting auction size increases until the middle to

end of next year, so August or November of 2026, and we don't

expect any increases in the long end either," Goldberg said.

"In fact, I wouldn't be surprised if there are some

decreases in size on the long end, but twos, threes, fives,

sevens, that's where the Treasury is going to really look to

finance themselves, not 10s, not 20s, not 30s. So it's really

that and bills."

Adding to Goldberg's point, Ian Lyngen, head of U.S. rates

strategy at BMO Capital Markets. noted that the U.S. Treasury

has become so market-sensitive that it is willing to pull back

on longer-term issuance if it leads to volatility in yields.

It is not just the Treasury Department that has been more

cognizant of the market's reaction, he said, but also Japan's

Ministry of Finance and the UK.

Money market funds, whose assets hit a record $7.4 trillion

in June, are well positioned to absorb part of that Treasury

supply, the strategists said. However, there has been a modest

shift recently away from Treasuries by these money funds and

into private repo transactions because of the latter's higher

rates.