Repeats Tuesday's column to additional subscribers without any changes. The opinions expressed here are those of the author, a columnist for Reuters.

By Jamie McGeever

ORLANDO, Florida, June 9 (Reuters) - The U.S. Treasury is issuing more than half a trillion dollars of T-bills per week on average. This spike in short-term financing is not a problem for now, but if U.S. borrowing costs rise further, it could become one.

The Trump administration is leaning more heavily on the shorter end of the borrowing curve, and for good reason. Persistently wide budget deficits and elevated inflation, which has been running above the Federal Reserve's 2% target for five years and counting, have pushed up the so-called term premium. That is the compensation investors demand for buying long-term bonds, and it makes short-term financing seem more attractive.

Rolling over $500 billion of bills every week isn't an acute problem. The market for cash-like instruments is huge, as they are critical for overnight and short-term collateral and liquidity management. With U.S. money market funds' balances nudging $8 trillion, and the Fed also buying bills for liquidity management purposes, there is still plenty of capacity to soak up the growing issuance.

But even demand for the highest-quality collateral isn't infinite, and flooding that market will eventually reach a point where supply can't be absorbed without a potentially dangerous spike in money market rates.

A more immediate issue for Treasury, however, may be its interest bill. The impact of rolling over notes and bonds at higher rates takes years to manifest, but only months with bills. With the federal interest bill already on track to top $1 trillion this fiscal year and Fed rate-hike expectations spiking, the fiscal hit is being felt.

25% THRESHOLD

How much is too much bill issuance, and are we nearing that tipping point?

Bills' current share of the total outstanding federal debt stock stands at just under 22%, slightly below the historical average of 22.4%, but above the 15% to 20% range recommended by the Treasury Borrowing Advisory Committee. The direction of travel appears to be toward 25%, a threshold many analysts say bears watching.

"It's hard to identify a tipping point number, but as you start to move above 25% of an expanding net borrowing need, the Treasury will have to look harder at the likely sources of demand," said Lou Crandall, chief economist at Wrightson ICAP.

This isn't a line in the sand that, once crossed, will suddenly sap demand for bills. In recent decades, though, bills' share of government debt has only been 25% or more during financial crises and recessions.

In other words, borrowing policies that were seen only during the 2020 pandemic and the 2008 financial crisis could now become the new normal. How the market will respond to that over time is a major unknown.

$1 TRILLION BARRIER

Right now, Treasury is facing record interest payments, in nominal terms and as a share of revenue and GDP. Cumulative interest costs for the federal government in the first four months of this year were $616 billion, up more than $100 billion from the January-April period two years earlier.

That means total interest payments are well on track to eclipse $1 trillion this fiscal year, according to the Congressional Budget Office, reaching 3.3% of GDP and 18.6% of revenues, all record figures.

And that tab is widely expected to get bigger, especially if rising inflation prompts the Fed to increase interest rates in the coming months from the current range of 3.50-3.75% – a scenario markets are already pricing in.

Not only would rate hikes boost short-term financing costs immediately, they could also imperil economic growth. The Treasury, already front-loading borrowing at the short end of the curve and paying onerous interest costs, would enter any slowdown or recession in a relatively weak position because the government would almost certainly ramp up bill issuance to cover falling tax revenues and increased benefit spending.

That could sap investor appetite and push yields higher, even if the Fed loosened policy to support growth.

"If there is a recession and automatic stabilizers kick in, this means even more bill issuance, and higher sensitivity to debt service costs," said Martin Tobias, U.S. rates strategist at Morgan Stanley.

Recession doesn't appear to be in the cards any time soon. But higher borrowing costs do, so a stock market correction and economic slowdown can't be ruled out. If that happens, the $500 billion-a-week T-bill rollovers will come under increased scrutiny.

(The opinions expressed here are those of Jamie McGeever, a columnist for Reuters)

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