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FUNDING STRESS IS A SHUTDOWN ISSUE NOT A BUYER’S STRIKE

ADMIN || 5th November 2025

Based on a statement released Monday by the Treasury, it looks like the department is set to hold coupons steady and let bills carry the load in its refunding announcement Wednesday. This matters, but it’s minor next to the Treasury General Account build and ongoing quantitative tightening, which are draining reserves and making cash scarce a squeeze that can’t end soon enough.

The Treasury market narrative is shifting decisively toward shorter-dated issuance as policymakers balance a mounting federal debt load against the need to maintain stable long-term yields. Bessent is expected to reaffirm this week that auction sizes for two- to 30-year coupons will remain unchanged “for at least the next several quarters.” The share of bills already above 21% could climb toward 26% by 2027.

At the same time, the Fed’s decision to end QT on Dec. 1 and reinvest much of the balance sheet runoff into Treasury bills provides additional demand that will help absorb the increased short-term supply. The shift effectively formalizes a structural bias toward bills in federal financing, reflecting a strategy to suppress term premiums and contain funding costs.

However, with the shutdown currently growing the TGA now around $1 trillion versus an $850 billion target liquidity is tightening. With the Overnight Reverse Repurchase Agreement facility basically empty, each extra dollar of bills issued lifts the TGA and reduces bank reserves in the system until Treasury spends again.

When reserves feel scarce, overnight repo benchmarks like SOFR and TGCR trade above the Fed’s interest-on-reserves rate, a clear sign the market is paying up for cash. The Standing Repo Facility then gets used more frequently, not just around month and quarter-end, which is another tell that funding is tight rather than that buyers are stepping back from Treasuries.

Higher repo volatility also means increases in haircuts in sponsored repo and more settlement fails, both consistent with fuller dealer balance sheets and collateral moving less smoothly. If these pressures persist, they can nudge bill pricing and auction outcomes, but for now they’re signals of a plumbing strain, not a demand problem.

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