Assuming Kevin McCarthy manages to get his “worthy” debt ceiling accord through a raucous House, the next question for markets is how the ensuing deluge of T-bill issuance, estimated at $1 trillion by the end of Q3, will impact liquidity.

I’ve obviously spent quite a bit of time editorializing around that question over the past two weeks. Importantly, any liquidity drain from the forthcoming bill tsunami would conspire with a number of other dynamics to create what could be a material headwind for markets. As JPMorgan put it, there’ll be “less cash to propagate financial assets.”

Looking strictly at the impact of Treasury issuance post-deal, it all comes down to the distribution of buyers and, relatedly, the extent to which money market funds can be coaxed out of the Fed’s RRP facility.

“Contrary to common assumptions, money market funds do not hold the majority of bills outstanding,” Goldman’s Praveen Korapaty noted, after reiterating that in the six to eight weeks after the debt ceiling is suspended, Janet Yellen will issue between $600 billion and $700 billion in bills. “The extent to which this will come out of reserves as opposed to the RRP facility will depend on a number of factors, including the shape of the bill yield curve, it’s pricing relative to the RRP facility rate and the distribution of buyers,” Korapaty wrote.

Goldman expects RRP balances to fall just $250 billion (at most), leaving the rest of the new supply to be absorbed by non-money market fund buyers, which is to say buying which would result in lower reserves.

Money market funds currently hold less than 15% of outstanding bills, Goldman observed, adding that although money funds are the “clear” marginal buyer during periods of “concentrated bill issuance,” they’ve generally reduced holdings over the past year for a short list of obvious reasons. As Korapaty went on to note, money funds “have preferred to avoid terming out, first amidst a rapid hiking cycle, and then because of inversion of the curve.”

Of course, bills are more attractive now (i.e., they cheapened amid the brinksmanship in D.C.), but they might not be attractive to money funds with RRP access for very long as a resolution to the debt ceiling standoff entices other buyers.

For his part, Barclays’ Joseph Abate sees Treasury issuing between $1.2 trillion and $1.4 trillion of bills through the end of the year. Whether the money to buy those bills comes from RRP or bank reserves “will determine how scarce reserves become and as a result, where fed funds, repo and CP rates trade,” Abate said. “In turn, the distribution between RRP and bank reserves depends on three key factors: Money-fund behavior, dealer balance sheet capacity and yields.”

Arguably (maybe it’s not arguable), more is better when it comes to how much issuance is absorbed by money funds, and Treasury can facilitate that outcome. As Nomura’s Charlie McElligott wrote last week, “whether money market funds can draw down from RRP and digest this supply comes down to the pace of issuance, the mix of maturities offered and, ultimately, the yield pick-up.”

I realize this all sounds rather dry when juxtaposed with flashy headlines around, say, Nvidia gunning for a $1 trillion market cap. But at least some strategists believe the liquidity implications of the post-debt ceiling Treasury cash rebuild could serve to cap equity market gains that might otherwise be inclined to extend on A.I. optimism.