A record $100 billion auction of 4-week Treasury bills is coming Thursday.

These are the risks. ‘It could turn into a situation in which everything is fine until it’s not,’ said Thomas Graff, chief investment officer at the Baltimore-based financial planning company Facet

By Vivien Lou Chen

Investors are preparing for a record $100 billion sale of 4-week Treasury bills on Thursday that will act as a test of demand. Investors are preparing for a record $100 billion sale of 4-week Treasury bills on Thursday that will act as a test of demand.

The government is about to take an unprecedented step toward meeting its financing needs on Thursday, by using a single auction to sell a record $100 billion of Treasury bills that mature in four weeks.

While observers expect this sale to go smoothly, a continued reliance on short-term bill auctions is not without risk. The risk is that such auctions might eventually expose the government to sharply higher financing costs for any number of uncontrollable reasons. Thursday’s $100 billion sale represents an increase of $5 billion from last week’s $95 billion auction of similar bills. A large part of the reason behind the Trump administration’s current dependence on greater T-bill supply to help finance its recently enacted package of tax cuts and spending changes is to avoid problems associated with a spike in long-term interest rates. The 30-year yield TMUBMUSD30Y 4.823% surpassed 5% in May on concerns about the U.S. fiscal outlook, followed by another brief spike above that level in July. Earlier this week, the nonpartisan Congressional Budget Office estimated that the fiscal signed into law by Trump on July 4 — officially known as Public Law 119-21, but colloquially referred to as the One Big Beautiful Bill Act — will result in an estimated impact on the federal deficit of $4.1 trillion through 2034, after factoring in debt-service costs. See also: Trump’s budget law could widen the deficit by $718 billion more than previously estimated. Here’s why. “As the deficit keeps growing, the Treasury is going to need to sell some kind of debt to the public, and right now it is choosing to set record amounts of bill issuances to help keep long-term interest rates low,” said Thomas Graff, chief investment officer at the Baltimore-based financial planning company Facet. “The trade-off is that you are going to put upward pressure on short-term interest rates simply from issuing more supply,” he said via phone on Wednesday. “And if we get to a point where there is less appetite for U.S. debt, you are courting the risk that it becomes more expensive to issue short-term bills when you do it over and over again.” For now, these risks appeared to be taking a back seat in Wednesday’s session. U.S. stock indexes

were rising as investors looked toward a $42 billion auction of 10-year notes in the afternoon. At FHN Financial in Chicago, strategist Will Compernolle pointed out that money-market funds held just over $7 trillion in the week that ended last Wednesday. He said this is one reason why most analysts think there is sufficient demand for Thursday’s $100 billion issuance of 4-week bills. Money-market funds tend to be one of the biggest buyers of T-bills.

Thursday’s sale is “symbolic of just how quickly the Treasury is ramping up its bill issuances,” and how big these auctions need to be to fund the federal deficit and to keep auction sizes unchanged for government debt maturing beyond one year, Compernolle said via phone.

“I don’t think the market will have a hard time digesting this issuance,” he added. “What’s important to note, however, is that when the government is financing this much in bills, it means its debt-service payments are more sensitive to changes in short-term interest rates. At some point, rates will go up and make our debt-service payments more than they are right now. The sizes of future T-bill issuances are expected to continue to increase past $100 billion, but the Treasury can tweak the size of its auctions if needed.”

Nonetheless, there remain plenty of reasons to be worried. The biggest reason revolves around the many variables that could send rates for short-term bills unexpectedly higher down the road. They include a potential buyers’ strike on the diminished appeal of U.S. assets; fears of resurging inflation, which might produce greater uncertainty over the likely path of interest rates; a recession that could cause investors to draw down their savings and make them less likely to buy T-bills; and even worries about the direction of the dollar.

The government is counting on the idea that investors will be willing to reinvest maturing proceeds from Thursday’s auction at future bill auctions, and to do so at the same rate.

But this may end up not being the case, according to Facet’s Graff. “That’s when the cost of debt service goes way up.”

As he explained, “the issue is what happens if something changes. Maybe inflation is higher. Maybe the economy is good, but people don’t hold as much money in cash. Maybe it is worries about the Fed cutting interest rates too much, causing inflation.

What’s scary is that problems could crop up at any time and it could turn into a situation in which everything is fine until it’s not.”