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The FOMC last month apparently decided to get ahead of the curve to keep bond yields from breaking out and wrecking the Federal Budget. The Fed is now buying $40 billion per month in T-bills, plus an amount necessary to replace their MBS holdings being prepaid in the normal course of business. This projects to around $50-55 billion per month in T-bill purchases from Primary Dealers.
This will help the dealers to absorb projected issuance of new Treasury debt of roughly $2.7 trillion per year, concentrated mostly in January and February, and then late May through year-end, with the exception of July and September.
This estimate is based on analysis of the end of month data for December and the rest of 2025 from the Daily Treasury statement. The data shows slight weakening in the growth trend of withholding taxes, and continued strong increases in tariffs. However, the increases in tariff revenue have been fully offset by similar declines in corporate income tax payments. The net gain from tariffs is minimal. The deficit appears slightly reduced but not enough for a material reduction in future Treasury supply.
Furthermore, adjusted for employee earnings inflation, the year-to-year change in withholding is negative.
This report explains what that means for the stock and bond markets in 2026.
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