Bills, Coupons, and the Buyer Rotation: How Treasury Finances a USD 2 Trillion Deficit in 2026

The deficit math: USD 2 trillion is the new floor #

The Congressional Budget Office's January 2025 Budget and Economic Outlook projected the fiscal year 2025 deficit at USD 1.9 trillion against an end of fiscal year 2024 figure of USD 1.83 trillion. The midyear refresh, conditioned on the IEEPA tariff revenue projection and the TCJA expiry treatment, narrowed the FY2026 baseline to USD 2.0 to 2.1 trillion. The deficit-to-GDP ratio sits between 6.5 and 7.0 percent, materially higher than the 50 year average near 3.7 percent and at a level historically associated with wartime or deep recession financing. The composition of the deficit has shifted: net interest now exceeds defense in budget outlays, having crossed that threshold in fiscal year 2024.

Net interest outlays for fiscal 2025 ran roughly USD 950 billion, and the FY2026 baseline pencils USD 1.0 trillion or modestly above. The CBO's medium term path through 2034 has the deficit averaging 6.0 percent of GDP, under current law assumptions. Whether the TCJA permanent extensions, the IEEPA tariff revenue offset, and any additional spending priorities of the Trump second term Congress shift this baseline materially is a 2025 to 2026 question. The market is pricing the medium term path: 10 year Treasury term premium estimates, calculated by the New York Fed's ACM model and the Adrian Crump Moench update, have moved out of negative territory since 2023 and run between 50 and 100 basis points through early 2026.

Bills above 20 percent: TBAC, dealer balance sheets, and the curve compression #

The Treasury Borrowing Advisory Committee, the dealer body that advises the Treasury on financing strategy, has historically recommended that Treasury bills make up 15 to 20 percent of the marketable Treasury debt stock. The actual bills share rose above 20 percent during 2023 as the Treasury financed the post debt ceiling rebuild of the Treasury General Account, and remained between 21 and 23 percent through 2024 and 2025. The TBAC has at successive quarterly refundings accepted the elevated share as a cyclical accommodation rather than a structural shift, but the explicit recommendation to compress back to the 15 to 20 band has been deferred each cycle.

Dealer balance sheet capacity is the operative constraint. Primary dealer Treasury inventory has run at multi decade highs in absolute terms but multi decade lows relative to the outstanding marketable debt stock. The April 2024 SLR (supplementary leverage ratio) reform proposed by the Fed, OCC, and FDIC would lift the regulatory cap on Treasury holdings for the largest banks; the May 2025 final rule under Vice Chair Bowman trimmed the relief from the original Barr proposal but retained a meaningful expansion of dealer Treasury capacity. The intent is explicitly to keep auction tails contained when bills supply is elevated and to support the secondary market through stress events. Implementation will be phased through 2026 to 2027.

The buyer rotation: foreign flat, Fed runoff residual, households and stablecoins growing #

Foreign holdings of US Treasuries totaled roughly USD 8.4 trillion at the most recent Treasury International Capital release for early 2025, against USD 7.4 trillion at end 2019. As a share of total Treasuries outstanding, the foreign share has declined from roughly 35 percent pre-pandemic to 28 percent. Japan remains the largest single holder near USD 1.1 trillion. China's holdings have declined from USD 1.3 trillion in 2013 to USD 760 billion in early 2025 per TIC; the magnitude of the actual reduction is partially obscured by custody reclassifications through Belgian Euroclear and through Cayman Islands, but the directional reduction is real. The structural foreign-buyer story is one of capacity growing in absolute terms (Japan stable, the Gulf SWF cohort growing, India and Korea growing) but underwhelming the issuance pace.

The Fed's quantitative tightening, slowed at the March 2024 FOMC and trimmed further at the May 2025 FOMC, currently redeems Treasuries at roughly USD 25 billion per month and MBS at a higher pace that is not capped. The Fed balance sheet sits around USD 7.0 to 7.2 trillion at early 2026 from a peak near USD 8.97 trillion in spring 2022. The next phase of QT, whether the Fed pauses Treasury runoff while continuing MBS runoff, is the question on the May, June, and July 2026 FOMC agenda. The marginal buyer base that has absorbed the runoff and the elevated bills supply is the combination of US households (TreasuryDirect savings purchases at multi-year records), money market funds (industry AUM exceeded USD 7.2 trillion in late 2025), and the emerging stablecoin treasury collateral pool (Tether and Circle reserves combined held above USD 200 billion in T-bills at year end 2025).

The auction calendar 2026: refunding statements and SOMA rolls #

Treasury announces its quarterly refunding strategy at four scheduled statements per year (early February, early May, late July or early August, and early November). Each refunding statement signals coupon issuance sizes for the next three months and signals direction for the following two quarters. The November 2025 statement increased the 10 year and 30 year auction sizes modestly and held the 2 to 7 year sizes flat, signaling Treasury's preference for extending duration where the market would absorb it. The January 2026 statement maintained the path. The May 2026 refunding will be the next inflection: TBAC will likely revisit the bills-share recommendation against the FY2026 deficit path.

The Federal Reserve's SOMA rollover schedule, governed by the New York Fed's open market operations desk, sits at residual cap pace. The Fed's preferred outcome on the SOMA portfolio composition, articulated in the July 2024 FOMC minutes and the September 2024 statement, is to return to a portfolio that closely tracks the outstanding marketable Treasury composition (the principle of holding Treasuries proportional to issuance). The implication is that as the SOMA portfolio shrinks, the Fed's purchases on rollover will tilt toward bills to match the elevated bills share, rather than concentrating in the long end. The market read of this is generally constructive for term premium: less Fed concentration in the long end allows price discovery to set the curve, with TBAC and dealer balance sheet absorbing the supply.

Stablecoin demand: the new structural buyer with regulatory clarity #

Tether (USDT) and Circle (USDC) together held roughly USD 200 billion in US Treasury bills at year end 2025 per their respective attestation reports, up from under USD 50 billion in 2022. Smaller dollar stablecoins (PayPal USD, Ripple RLUSD, Agora AUSD, the bank-issued stablecoin pilots from JPMorgan and Bank of America under the OCC interpretive framework) added roughly USD 30 to 40 billion of additional Treasury collateral demand. The cumulative stablecoin Treasury holdings rank near the top 20 single foreign holders in the TIC table on a same scale.

The GENIUS Act framework, signed into law in late 2025 after passing the Senate and House on broad bipartisan margins, sets the federal stablecoin regulatory regime. The Act requires stablecoin issuers to hold reserves in cash and Treasury bills with maturity 93 days or less, prohibits commingling, requires monthly attestations, and grants the OCC and the state banking regulators a dual licensing framework. The implication for Treasury financing is direct: every dollar of stablecoin growth becomes a dollar of bills demand, with maturity tightly concentrated. The CBO scoring of the Act estimated incremental Treasury bills demand of USD 50 to 100 billion per year of stablecoin issuance growth through 2030. The macro question is whether stablecoin growth at this pace materially affects the bills-curve term premium and the TBAC's recommended bills share.

Implications for portfolio managers, banks, and the medium-term path #

For portfolio managers, the curve in 2026 is anchored by elevated bills issuance, residual Fed runoff, a foreign buyer base growing in absolute terms but not in share, and a household and stablecoin marginal buyer base that prices T-bills at carry rather than at duration. The 2 to 5 year part of the curve is where the marginal supply meets the most elastic demand; the 10 to 30 year segment is where term premium remains a debated number. Real yield levels (TIPS 10 year near 1.5 to 2.0 percent through early 2026) are higher than any sustained period since 2008, which is the binding macro signal for risk asset valuations and sovereign-credit spread relations.

For banks, the SLR final rule under Bowman expands Treasury holding capacity at the largest banks by approximately USD 1.5 to 2.0 trillion of headroom, phased through 2026 and 2027. The intent and effect is to support the secondary Treasury market through stress events and to absorb a portion of the bills supply. Dealer Treasury inventory share will rise moderately. Custodian banks (BNY Mellon, State Street, JPMorgan custody) will see continued growth in stablecoin reserve servicing fees. For Treasury, the medium term financing strategy depends on whether the deficit baseline is renegotiated (TCJA permanent extension, IEEPA tariff revenue conversion, and any FY2027 debt limit episode) and on whether the TBAC formalizes a new bills share recommendation. Sisyphus models the buyer rotation under three scenarios; Promethean tracks the auction calendar, dealer positioning, and the QT deceleration cycle.

Sources #

• US Treasury Monthly Treasury Statement
• US Treasury Quarterly Refunding statements
• Treasury Borrowing Advisory Committee minutes
• Congressional Budget Office Budget and Economic Outlook
• Treasury International Capital data
• Federal Reserve H.4.1 weekly balance sheet
• New York Fed ACM term premium model
• Investment Company Institute money market data
• Tether and Circle attestation reports
• OCC GENIUS Act implementation guidance
• Federal Reserve FOMC statements and minutes
• Reuters Treasury market coverage