The Debate
▲ Bull Case
Every auction has been covered. Primary dealers are required to bid. Foreign central banks still hold Treasuries as reserve assets. The market has absorbed record supply without a dislocation.
▼ Bear Case
Dealer balance sheets are constrained by regulation. RRP is gone. Foreign official demand is declining. QT removes reserves while issuance adds supply — both sides tighten simultaneously. One auction failure changes the narrative.
The Mechanism
The issuance-absorption-reserves triangle Treasury issues debt. Dealers must absorb it and fund inventory via repo, draining bank reserves. When reserves fall below a critical threshold, repo markets seize — September 2019 was the preview. The Fed is simultaneously withdrawing reserves via QT. The risk is non-linear: not a gradual yield rise but a sudden market function failure.
Key Voices
Bears — Plumbing pressure building
Zoltan Pozsar
Former Credit Suisse / ex-Fed NY
“The plumbing is the risk. Everyone focuses on rates. No one focuses on reserves.”
Priya Misra
JPMorgan Asset Management
“The auction cycle is becoming the dominant driver of short-term rates. This is structurally new.”
Bulls — Market absorbing supply
Scott Bessent
US Treasury Secretary
“We are focused on the maturity profile. The goal is to extend duration over time and reduce rollover risk.”
Narrative Timeline
Archive Record
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