(Bloomberg) -- Whether this year’s mammoth run-up in US Treasury bill supply can be easily digested will depend largely on the Federal Reserve’s key liquidity facility. 

Since the government suspended the debt ceiling in June, the Treasury has issued nearly $1.4 trillion of bills, with maturities ranging from one month to a year. The ongoing deluge has given investors — mainly money-market funds — an alternative to just parking their cash at the Fed’s overnight reverse repurchase agreement facility. 

The bill supply bump has helped drain over $1 trillion from the facility in the past four-and-a-half months bringing balances to around $1.09 trillion today.

Until the Treasury unleashed this supply, money funds had very few places to invest their cash that would earn more than the Fed’s reverse repo facility and allow the industry to pass along the central bank’s rapid rate increases in the form of higher yields. 

Markets participants have had little trouble absorbing the flood of supply. The spread between bill rates and overnight index swaps — a proxy for monetary policy expectations — has been gradually widening, and dealer holdings of T-bills are at the lowest level in more than two months. 

Should the Fed’s RRP continue draining at such a fast pace, there’s a risk that the rapid exodus of cash and money-market funds extending the weighted average maturity of their assets could rapidly drive T-bill yields higher, according to Bank of America strategists Mark Cabana and Katie Craig. While they expect less than 5 basis points of widening in the spread, they can’t “rule out a larger impact,” especially if the Treasury offers more bill supply. 

In the department’s latest refunding survey, it asked primary dealers how much larger current bill auction sizes could become without denting demand. The Treasury Borrowing Advisory Committee — a group comprising dealers, investors and other stakeholders — has long recommended T-bills make up between 15% and 20% of total debt outstanding, in order to minimize rollover risk while ensuring the securities remain liquid. Yet, at the August quarterly refunding, the committee said it’s comfortable with short-dated obligations taking up a larger share. 

Meanwhile, usage of the Fed’s RRP is expected to continue draining, especially next week when auction settlements and month-end funding dynamics will result in counterparties briefly stashing cash at the central bank on the final trading day of October and subsequently removing it. 

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