Analysis-US Treasury bill issuance grows, heightens long-term risk

By Gertrude Chavez-Dreyfuss

NEW YORK, July 23 (Reuters) – The U.S. Treasury increased sales of short-term bonds this month as the government borrowed more. This strategy found many willing buyers but sparked debate about the risks of relying too heavily on near-term financing.

Rising federal deficits and higher interest payments have sharply increased U.S. borrowing needs, leading the Treasury to increase its issuance of short-term debt, which is quickly absorbed by money market funds, the largest bond buyers.

But some analysts have warned that relying on short-term debt for long periods leaves the government vulnerable to changes in interest rates because debt must be refinanced more frequently than long-term bonds.

“If interest rates have to rise significantly, the cost of funding will be significantly higher because you have to repay a lot more when it’s all treasury bills,” said Dhiraj Narula, chief U.S. interest rate strategist at HSBC, referring to longer-term debt. he said.

A senior Treasury official said in a statement that “changes in short-term interest rates do not affect the vast majority of the government’s interest costs” because more than 75 percent of salable debt has fixed interest rates of two years or longer.

Wells Fargo macro strategist Angelo Manolatos said net bill issuance of about $270 billion so far in July has already surpassed his $256 billion forecast for the full month. According to Treasury data, net new issuance in the first half of 2026 was 143 billion dollars.

The increase in Treasury bill issuance in July reflects the government’s need to rebuild its cash balance and finance seasonal spending, including as analysts say tariff-linked refunds are higher than expected.

RISING INVOICE SUPPLY

Total bill supply in 2026 is expected to reach $827 billion, up from about $360 billion in 2025, Goldman Sachs said in a note.

The Treasury has been heavily reliant on bonds since 2023 after Congress suspended the debt ceiling. It had to restructure its cash as the Treasury turned to bonds because its issuances could be increased quickly.

U.S. Treasury Secretary Scott Bessent continued this policy when he took office in 2025, leaving coupon auction sizes unchanged to help contain borrowing costs. By relying more on bonds, which generally provide lower returns than long-term securities, the Treasury is able to borrow at lower interest rates and limit interest expenses.

Bills now account for 22% of marketable debt outstanding, while bonds and notes account for 78%. The Treasury Borrowing Advisory Board wants to keep bond issuance at 15-20 percent.

THE AVERAGE US DEBT MATURITY IS SHORTER

The average maturity of U.S. government debt — about six years — is shorter than that of Britain and Japan, but largely in line with most advanced economies. This is important because it determines how quickly higher interest rates are reflected in government borrowing costs and how often the Treasury must refinance its debt, making it an important indicator of both fiscal risk and interest rate sensitivity.

Some analysts also say demand from money market funds, which have about $8 trillion in assets, may not be able to keep up with the latest onslaught of new issuance, at least for July, because of seasonal flows.

Wells Fargo’s Manolatos noted that “fund inflows tend to be low early in the quarter,” noting that cash balances have increased by an average of $152 billion in July and August over the past three years. But most of those entries came in August.

“Monetary funds have also poured in a large number of treasury bills since the beginning of the year, and inflows alone will not be enough to cover the supply of bills,” Manolatos said, adding that treasury bill assets fell by $365 billion in the first half of 2026.

“They may have to extract the money from other assets to purchase these notes.”

Some strategists have also warned that over-reliance on bills could limit the Treasury’s options in any future crisis.

During the COVID-19 pandemic, the Treasury used almost all of the bonds for its financing needs as it had to raise trillions of dollars quickly. Therefore, the share of bills as a percentage of debt increased to over 25% during this period.

“If you’re running treasuries with 30% of marketable debt in good times, you don’t have the same capacity when the crisis hits,” said Zach Griffiths, head of macro and investment-grade strategy at CreditSights.

Investor appetite remains strongest at the front end of the curve and will continue to emphasize Treasury bond issuance, given “strong money fund inflows, while demand further up the curve is weaker due to higher deficit concerns,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities.

(Reporting by Gertrude Chavez-Dreyfuss; editing by Megan Davies and Nick Zieminski)