Financial markets are breathing a sigh of relief following an agreement between Democrats and Republicans to raise the debt ceiling and avoid a default. Not surprisingly, equity markets are reaching their highest level since last summer, and stocks are now up more than 20% from last October’s lows.

However, one consequence is that a major wave of Treasuries is expected to hit the market in the coming weeks as the US Treasury looks to replenish its holdings since the Treasury reached its limit on borrowing in January. 

According to Wall Street, there is expected to be issuance of $400 billion in June and $500 billion between July and September with a cumulative total of $1.3 trillion by the end of the year. Some are warning that this could lead yields to modestly push higher and reduce overall market liquidity for equities and fixed income.

Others are more sanguine and believe that this new supply will be absorbed by money market funds who are looking to move money out of repo facilities and into longer duration Treasuries. 

Another variable that could impact Treasury demand is whether the Fed will continue hiking rates or has the hiking cycle truly ended. The latter scenario would be more beneficial for fixed income, while the former would crimp demand. 

Finsum: Financial markets are recovering strongly from the debt ceiling agreement, but an onslaught of Treasury supply could have a major impact on fixed income markets.