Treasury-bill yields have risen sharply as a wave of new issuance tests investor demand, posing a threat to the stability of overnight funding markets. According to Bloomberg reports, the eight-week bill auction this week recorded record-low demand and yields at 4.05%, marking the highest level in over a year. This evidence demonstrates investor reluctance to pile into the growing supply of bills to fund the widening deficit and an uncertain path of Federal Reserve interest rates over the coming months.
Treasury has already issued nearly $100 billion of net T-bills through the first half of October, as reported by Bloomberg. Barclays estimates that coming supply will exceed $320 billion over the next six weeks. This substantial issuance volume has caused bill rates to widen relative to swaps on the Secured Overnight Financing Rate, a market-based metric considered the risk-free rate.
Despite growing stress in T-bill markets, funding markets remain flush with cash, leaving them vulnerable to the growing pressure evident in T-bill debt. As reported by Bloomberg, for most of October, SOFR has traded at or below the interest on reserve balances rate, suggesting liquidity remains abundant despite growing pressure in the bill market. Barclays strategist Samuel Earl noted that "several competing forces are shaping money markets this month," creating a market caught between emerging funding pressure and surprisingly subdued conditions.
Money-market funds, the biggest buyers of T-bills, have seen inflows slow just as issuance accelerates, according to Bloomberg reports. The duration positioning of taxable money funds has fallen to 35.3 days, down 3.4 days year-to-date and down 7.7 days from the peak seen in mid-April, as reported by Wells Fargo & Co. citing Crane Data LLC. The drop was most pronounced among Treasury funds, with institutional segment maturities down nearly 10 days from end-April.
The rising bill yields are creating ripple effects across the entire Treasury curve, with long-term bonds also facing pressure. According to recent market analysis, TLT, the iShares 20+ Year Treasury Bond ETF, has declined approximately 1% over the past month and 5% over the three-month trend, driven primarily by rising long-end Treasury yields rather than credit risk concerns. The fund's extended duration of around 16.5 years means price movements are magnified when long-term yields shift, making it particularly sensitive to current market conditions.
