Can Money Market Funds Absorb Higher T-Bill Issuance? Expanding issuance of any asset, especially in the form of debt, requires confidence that the increase in issuance will be met with strong demand. From the Treasury’s standpoint, expanding T-bill issuance requires confidence that the market can digest additional supply without pushing yields excessively higher. Recent history suggests that MMFs are well-positioned to scale accordingly. Over the past two years, MMFs have repeatedly demonstrated their ability to shift allocations toward T-bills when issuance rises. In periods when the Treasury ramps up bill supply, such as the post-debt-ceiling surge in mid-2023, MMFs shouldered the bulk of the increase, funded largely by drawing down their ON RRP balances.
However, these dynamics do not come without risks. MMFs must maintain liquidity buffers, as redemption pressures can force selling and create market stress, basic market dynamics. Dealer balance sheets, constrained by both regulatory limits and risk frameworks, also limit the intermediation available during periods of rapid issuance. Additionally, while MMFs have shifted away from ON RRP, a substantial drop in yields could shift allocations back toward the Fed facility or other overnight instruments, reducing their marginal demand for bills.
WHILE MMFS ARE SHIFTING TOWARD T-BILLS, RISKS REMAIN— REDEMPTION PRESSURES, DEALER CONSTRAINTS, AND POTENTIAL YIELD DROPS COULD REVERSE THIS TREND AND IMPACT MARKET STABILITY.
However, there is also another demand factor that is working in the Treasury’s favor, as Treasury Secretary Scott Bessent recently noted: stablecoins. Stablecoins, which are cryptocurrencies pegged or tied to a currency such as the dollar, are becoming an increasingly important factor of Treasury funding. State Street CEO Yie-Hsin Hung said about 80% of stablecoin reserves are invested in T-bills or repos, roughly 2% of the overall market. Bessent has further projected that stablecoin demand could reach $2–3 trillion by 2030, positioning them as a potentially significant marginal buyer of the front end.
These dynamics remain particularly important as the Treasury’s financing mix is expected to continue shifting toward bills in the coming quarters. Given rising deficits and limited room to expand coupon issuance, bills offer the Treasury the most flexible tool for meeting short-term funding needs. MMFs (and stablecoins) represent large, flexible, and willing investors in the Treasury market, offering deep pools of liquidity; however, crediting them as a “blank check” for unlimited bill absorption would be a mistake. Monitoring MMF flows, ON RRP usage, stablecoin reserve allocations, and dealer balance sheet capacity will be essential to manage the shifting dynamics. If these lines of demand remain strong, the Treasury’s strategy may succeed —but if any weaken, risks could begin to surface.
J.P. Steiner E:
john.steiner@
admis.com
7 | ADMISI - The Ghost In The Machine | Q4 Edition 2025
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