Excess Returns · Saturday, August 29, 2026
A complex potential mechanism for debt monetization is discussed, involving the Treasury buying back longer-dated securities and replacing them with near-dated T-bills. This could overwhelm the market for T-bills, leading primary dealers to buy them, thus reducing system reserves and increasing front-end funding costs, potentially forcing the Fed into reserve management purchases.
“If we get into a situation where the treasury is buying back all sorts of, uh, longer dated securities and replacing them with near-dated T-bills.”
“We could get into an environment where that T-bill issuance overwhelms the amount of capital that is willing to be invested at that part of the curve.”
“And this is what we experienced last year. As the Federal Reserve was reducing the size of its balance sheet, they were feeling around for the point where they hit this minimum level of ample reserves.”