Reduction in issuance of T-bills and other Treasury debt will counter the effect of the Fed's impending taper of asset purchases.

"Episodes of market dysfunction are not only likely to continue but to occur with increasing frequency" unless market-making capacity for Treasuries trading is increased or the U.S. halts the rapid build-up of its debt outstanding.

She sees risk of default as early as October, if Congress fails to act on a debt-limit hike when the two-year suspension ends on Saturday.