The Hidden QE

Treasury is running its own liquidity operation and it is substantially increasing liquidity They currently expect to borrow about $739 billion in Q3 and another $628 billion in Q4 or roughly $1.37 trillion during the second half of the year. An increasingly large part of that financing is being pushed into short term Treasury bills and not longer dated notes and bonds. Net bill issuance is about $270 billion in July alone and the estimates put total 2026 bill supply at around $827 billion. Last year that was roughly $360 billion and with that bills now represent around 22% of Treasury debt. So, why QE? I consider this a form easing because T-bills are highly liquid and cash like with very little duration risk (their market value is much less sensitive to changes in interest rates than longer dated bonds). The fiscal deficit continues injecting money into the private sector but financing more of it with bills means investors aren't being forced to absorb nearly as much long-duration risk. This is important as large issuance of longer dated debt can push yields and term premia higher while also tying up balance sheet and risk that could otherwise be deployed elsewhere. Bills are much easier for money market funds and institutions to absorb and they can also be readily used as collateral in the funding markets. So the government can continue running a large deficit without removing nearly as much liquidity and risk taking capacity from the financial system. At the same time, the Fed is currently making around $10 billion per month of additional Treasury purchases to maintain adequate reserves, alongside its reinvestments. Together with the fiscal impulse and the shift towards bill financing it creates a more supportive liquidity environment for equities and gold. BUT the risk comes later if the fiscal impulse becomes sufficiently inflationary to push long-term yields materially higher which would eventually start working in the opposite direction. We are not there yet