Get ready again for some wild fluctuations in the U.S. Treasurybill market. On March 16, the statutory limit on the nation's debt,better known as the debt ceiling, will be reinstated.

Here's a guide for what to watch for as the Treasury Departmentbegins to resort to “extraordinary measures” in the coming days tocontinue to fund the government while meeting a legal requirementto limit the nation's cash balance.

How Did We Get Here?

As part of a deal struck to avoid a default during a November2015 political showdown, the Treasury will have to slice itsoperating balance to $23 billion by next week. That's the amountwhen the compromise was reached by Congress in 2015 to avoid makingthe debt ceiling an issue again during the presidential election.Officials have already cut the cash by more than $200 billion sinceFeb. 10.

To meet the target, Treasury is trimming bill auction sizes,helping to keep bill yields from rising as fast as longer-maturitydebt. Since Feb. 14, the four-week bill auction was slashed by $30billion to $15 billion. The three- and six-month sales were reducedby $4 billion each on March 6. This means Treasury will pay downabout $116 billion of bills during the next week, including $70billion of cash-management bills, according to ThomasSimons, a senior economist at Jefferies. About $177 billion ofbills have been retired since Dec. 1.

The efforts to reduce the cash balance, coupled with over $1billion in increased demand from government money-market funds, aproduct of the Securities and Exchange Commission's October 2016reforms, has exacerbated a supply crunch in the bill market.Treasury securities maturing around the March 16 reinstatement areyielding nine to 10 basis points less than bills rolling off March15 as investors fear being caught short of the securities. Debtthat matures sooner usually trades at a higher price.

As a result, other short-term funding markets that trade offTreasury bill supply/demand dynamics are also seen as trading rich.The rate on overnight-repurchase agreements has been hoveringaround 53 basis points, just above the Federal Reserve's50-basis-point target rate range floor, down from as high at 76basis points earlier this year. The drop in repo rates relative tobanks' unsecured funds rates has driven the two-year swap spread —the difference between the swap rates and similar maturity Treasuryyields — to near the widest level since May 2012.

What Happens Next?

The dislocations in money markets are expected to reversequickly as the Treasury adds borrowing capacity after March 15 byusing measures such as suspending contributions to governmentaccounts and funds, halting the issuance of securities used bymunicipalities to help refund older debt and sales of savingbonds.

Bill auction sizes have already been increased as Treasuryannounced Thursday it will sell $36 billion of three-month and $30billion of six-month tenors on March 13 for March 16 settlement, a$6 billion rise for both. Another $35 billion in 35-day bills willalso be sold. Officials could raise as much as $120 billion in newcash in the bill sector in the 15 days after the March 15 reset,according to Lou Crandall, chief economist at Wrightson ICAP.

The Congressional Budget Office has projected that theaccounting maneuvers, combined with the typical inflow of taxreceipts, should allow Treasury to finance the government's normaloperations for several months without an increase in the debtlimit.

Drop-Dead Date

If Congress doesn't lift the debt ceiling or suspend it again,the Treasury would probably run out of cash in the fall, the CBOestimated in a March 7 report. This hard debt-limit wall, as somecall it, wouldn't likely be faced until the end of September,according to Jefferies.

The re-infusion of bills is seen causing money markets tonormalize. With more bills used as collateral, repo rates will riseand the gap over the Fed's target floor will increase, helping tonarrow swap spreads, predicts Michael Cloherty, the head of U.S.interest-rate strategy at RBC Capital Markets.

Bills will likely return to about the same percentage of totalmarketable government debt as before the supply cuts kicked in andthen move higher, traders estimate. Treasury has focused in recentyears on raising the percentage of bills from historic lows givengrowing demand.

Investors are closely watching Office of Management and Budgetdirector Mick Mulvaney to see whether he will fellow hispredecessors' leads and push to avoid a protracted debt-ceilingissue. The former congressman, who regularly voted against raisingthe federal borrowing limit in the past, may includediscussions on the topic as Congress works to finish a spendingpackage in April. Senate Majority Leader Mitch McConnell, speakingat event in Washington Thursday, said “of course we raise the debtceiling.”

“With the extra $1 trillion now in Treasury and governmentfunds, it would be a colossal nuisance if we got to the point againwhere the debt ceiling became a real issue,” said Patricia A.Larkin, chief investment officer of cash investment strategies atDreyfus Corp., which manages $145 billion in U.S. money-market fundassets. “We hope with the new administration that we don't getthere.”

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