Preface
On May 27, 2025, the U.S. Treasury Department reduced the auction size of four-week and eight-week Treasury bills for the first time since February this year, reducing them by $10 billion to $75 billion and $65 billion respectively, while the 17-week Treasury bill remained unchanged at $60 billion. This move may seem like a technical adjustment on the surface, but it is actually a defensive fiscal operation in response to the pressure of the debt ceiling, marking the federal government's financing entering a tightening phase.
Figure 1: Short-term Treasury bill auctions shrink in size (Source: Bloomberg)
Unconventional measures are reaching their limits, X-Date is coming
At the beginning of this year, the United States exceeded the statutory debt ceiling, and the Treasury Department was forced to launch extraordinary measures to avoid technical default. By the end of April, most of the extraordinary funds had been used up. The latest data showed that on May 21, only $67 billion of extraordinary measures were available in addition to cash, which was further reduced from $82 billion a week ago. The flexibility space was sharply reduced, and fiscal operations entered the final stage.
Figure 2: Changes in the amount of funds for unconventional measures (Source: Bloomberg)
Short-term debt reduction is not only to reserve financing space, but also has strategic scheduling intentions. In mid-June, the issuance of medium- and long-term government bonds is large in scale and long in term, requiring greater debt space. If the debt ceiling is not resolved, short-term debt will continue to be compressed to give way to key medium- and long-term debt. Short-term debt is highly flexible and can both delay the pressure of fund payment and temporarily slow down the increase in total debt. It is the Ministry of Finance's preferred adjustment tool.
Short-term government bond tightening has led to a sharp increase in the use of ON RRP
The impact of the reduction in short-term debt on the money market has been significantly reduced. 4-week and 8-week short-term debts are important liquidity assets of institutions such as money market funds (MMFs). The reduction in supply has forced funds to look for alternative tools, and the demand in the repo market has shifted to the Federal Reserve's overnight reverse repo mechanism (ON RRP), making it a new destination for funds. Specifically, recent data shows that the scale of ON RRP usage surged to about US$315.7 billion on May 30, a surge of US$150 billion from the previous day, reaching a new high since the end of March. This reflects that the tightening of short-term debt has caused a large amount of market funds to flow back to ON RRP. The cumulative data released from the beginning of the year to date show that MMFs have reduced their holdings of US Treasury bonds by US$278 billion and increased their repurchase agreement allocation by US$231 billion, indicating that asset allocation has changed significantly, and ON RRP has once again become an important liquidity undertaking tool.
Figure 3: Overnight reverse repo fund size of the Federal Reserve (Source: MacroMicro)
Short-term debt reduction is no longer just a fiscal operation, but has become a key factor affecting the structure of the money market and interest rate stability. ON RRP has changed from providing a lower limit on interest rates to providing an alternative safe asset provider. In addition, the current US market liquidity is still shrinking under the background of balance sheet reduction. Even if the short-term debt is reduced by 10-20 billion US dollars, it will cause a sharp fluctuation in the demand for repurchase and reverse repurchase, highlighting the fragility of the financial market and the intensification of systemic risks.
Figure 4: Federal Reserve Total Assets & Balance Sheet Reduction Progress (Source: FRED)
In short, the current reduction in short-term debt has triggered the following chain reactions on the market:
Reduction in short-term debt issuance → Reduction in the supply of safe assets → Reallocation of MMFs and institutional funds → Repo demand flows to ON RRP → Market sensitivity to liquidity changes increases & potential volatility intensifies
Conclusion
Recently, the U.S. Treasury has reduced its short-term debt issuance under the pressure of the debt ceiling. On the surface, it seems to be a simple adjustment of the financing rhythm, but in fact it has profoundly affected the capital allocation structure and interest rate mechanism of the entire financial system. This change reveals that when the statutory debt ceiling becomes an institutional bottleneck, every technical operation of the Treasury Department may be amplified through the money market, further exacerbating the market's sensitivity and volatility to marginal changes in liquidity.
The Fed's overnight reverse repurchase mechanism (ON RRP), which was originally phased out with the expectation of interest rate cuts, was forced to return to the core of funds underwriting in the context of a shortage of safe assets, becoming an important role in regulating liquidity and stabilizing fund prices. From the perspective of policy transmission, the reduction of short-term debt has become a key node in the intersection of monetary policy and fiscal operations. If the debt ceiling issue is not resolved, the supply of short-term debt will continue to be restricted, which will trigger violent fluctuations in the repurchase market, thereby threatening the market stability mechanism that has long relied on prudent and neutral operations.
Overall, this is not just a simple adjustment of the bond issuance rhythm, but also highlights the structural tension between the current fiscal and monetary policies in the United States. The author believes that in the coming months, the US debt ceiling will be the core issue with the greatest impact on the entire market after trade tariffs. More in-depth analysis of this related issue will help improve the understanding of overall investment risks.
