More than $1 trillion in U.S. short-term bills are set to hit the market following the debt ceiling increase, with money market funds ready to buy. Treasury bills are crucial for funding government spending and are seen as safe assets. Treasury Secretary Bessent prefers short-term debt over long-term bonds due to current interest rates.

J.P. Morgan, Barclays, and TD Securities project $900 billion to $1.6 trillion in new Treasury bill issuance over the next 18 months. Despite the large supply, money market funds like Federated Hermes are confident they can handle it. This year’s projected T-bill supply surpasses previous debt ceiling events.

With the approval of the spending bill, the Treasury increased the size of bill auctions by $25 billion each. Money market funds have avoided certain maturities due to debt ceiling restrictions, but with more T-bills coming, they may need to reallocate assets. The Fed’s reverse repo facility has declined sharply, posing a challenge for absorbing more Treasuries.

The Fed’s quantitative tightening has reduced liquidity in the financial system, impacting money market funds. Analysts believe funds will shift from regular repos to T-bills due to higher yields. Money market funds continue to attract investors, with yields significantly higher than bank deposits. Households are expected to move deposits from banks to money funds.

Overall, the surge in Treasury bill supply is expected to be absorbed by money market funds, despite challenges with the reverse repo market. The demand for safe and liquid assets like Treasury bills remains strong, with analysts projecting continued growth in money market fund assets.

Read more at Yahoo Finance: Analysis-A slew of T-bills coming? Money market funds say ‘bring ’em on’