QE by Another Name: How Treasury's Bill Blitz Will Drive the Market

As the second half of 2025 kicks off, markets are adjusting to a landscape where macro calm on the surface may be masking powerful undercurrents below. While headlines focus on tech earnings, rate cut bets, and geopolitics, the real liquidity driver lies deeper in the system, the US Treasury’s shift toward aggressive short term borrowing. This move, referred to as Activist Treasury Issuance (ATI), is becoming one of the most important yet underappreciated forces shaping market risk appetite.

This policy shift is being led by Treasury Secretary Scott Bessent, who has made it clear that locking in high long-term yields "makes no sense" given the current rate environment. Instead, the Treasury is issuing more T bills, boosting short term debt supply and expanding the collateral base. Earlier in the year, before tariff concerns returned, we argued that the US economy would avoid recession largely due to liquidity dynamics. Bessent’s latest stance on front end funding is now reinforcing that view, and it's emerging as a critical reason why equities continue to climb despite structural risks.

ATI refers to the Treasury's issuance of debt over and above baseline borrowing needs, especially in the form of short term instruments like T-bills. This surge is tied to multiple macro developments for example like a ballooning deficit from Trump era and current fiscal policies, and the need to replenish the Treasury General Account (TGA). According to recent Treasury statements, new issuance could reach $1T in the back half of 2025, with roughly $700B concentrated in Q3. Notably, the bulk of this issuance is skewed toward the short end bills with durations of 1 to 12 mths.

Source: US Treasury.

So why the focus on the short term issuance? Secretary Bessent made the rationale explicit, it makes no sense to lock in longterm borrowing at current elevated yields. With 10 yr rates near 4.25%, compared to near 4% levels on the front end, the government is prioritizing short term funding to "save on interest." But this is not just a debt management choice. T-bills are not merely debt instruments, they are monetary collateral. In repo markets, derivatives margining, and shadow banking, bills are cash equivalents. By expanding the supply of T-bills, Treasury is inadvertently increasing the collateral base of the financial system.

Source: FRED

While an increase in T-bill supply would traditionally be expected to raise short term yields, that logic breaks down in today’s liquidity environment. The demand for bills, from money market funds holding over $7.4T in assets, is so deep and sticky that yields have remained remarkably stable despite the surge in issuance. T-bills offer slightly higher returns than the Fed’s overnight reverse repo facility and serve as pristine collateral across the financial system. In fact, their value as collateral may outweigh their role as yield bearing instruments. More T-bills mean more balance sheet capacity, more leverage, and more liquidity sloshing through repo and derivatives markets. So even if yields edge higher, the net effect of ATI is procyclical, it boosts collateral availability, compresses volatility, and indirectly eases financial conditions, fueling equity markets, not choking them. For example, the positive spread between 3mth bills and the Fed’s RRP rate is incentivizing collateral uptake by money markets, supporting the ATI transmission.

Source: Bloomberg

Hence the effects of ATI extend far beyond simple debt management. When Treasury issues more short term bills, it's not just borrowing money, it's creating high quality collateral that reshapes the plumbing of the financial system.

Here's how that transmission unfolds in detail:

1. T-bill issuance expands the collateral base - Treasury bills are considered “pristine collateral” because they carry zero haircut in repo markets and are universally accepted in margin agreements. An increase in their supply provides more building blocks for leveraged finance, they’re essentially the fuel of shadow banking.
   

2. More collateral leads to higher collateral velocity - Once in the system, these bills are reused across transactions, repo, derivatives margining, B2B lending. This increase in collateral lets the same Treasury bills get reused over and over in financial transactions, kind of like passing around the same dollar bill. That boosts overall borrowing in the system, even without banks making new loans."
   

3. Leverage rises hence demand for risk assets increases- With more usable collateral, hedge funds, banks, and other market participants can deploy more capital. This fuels demand for equities, credit, and even crypto, anything with upside convexity.
   

4. Volatility declines leading to a structural compression, trades flourish - As investors pile into riskier trades, implied volatility (like the VIX) tends to fall. Lower volatility encourages dealers to sell even more options, which pushes volatility down further. This sets up a feedback loop, where lower vol allows for more option selling and more aggressive positioning, like call overwriting or short-dated (0DTE) options. These strategies require dealers to buy stocks as they hedge, which helps push equity prices higher in a self reinforcing cycle.
   

5. Carry strategies thrive - When volatility is low and there’s plenty of liquidity, investors focus on strategies that earn small, steady profits, like lending money for slightly higher interest, betting on stable currency trends, or buying stocks while betting volatility stays low. These strategies quietly drive up asset prices as more money flows into them.
   

This collateral based liquidity dynamic is why ATI behaves like "QE without QE." The Fed isn’t expanding reserves, but the Treasury is doing something similar by increasing collateral availability which in today’s financial architecture, is just as powerful for driving leverage and asset demand. To support this, Divisia M4, a broad money supply measure that includes shadow banking liquidity, has started rising again, confirming that liquidity is flowing back into the system even without traditional QE.

Source: Bloomberg

ATI is a liquidity supercharger. It bolsters GDP mechanically (through interest savings and financial market wealth effects), compresses vol, and fuels risk on behavior. But the very leverage it enables is also a vulnerability. A shift in sentiment, a geopolitical shock, or a misstep in execution (e.g longend supply surprise) could cause a reflexive unwinding.

For now, though, the Treasury not the Fed is steering the liquidity ship. And until the collateral wave abates, risk assets are likely to stay supported. But the feedback loop can turn. A spike in volatility, a failed Treasury auction, or a surprise macro shock could reverse positioning quickly. For now, though, the message is clear, ATI is this market’s hidden bull engine, but don't forget where the fuel line connects.