Yields on 10-year Treasuries could exceed 4% in order to win over investors.

New paper from the Dallas Fed points out that although "long-term Treasury bonds may have no default risk, they have liquidity risk and interest rate risk ... especially in times of financial market stress."

The impending barrage of T-bills is a precursor to a glut of longer-term debt issues, which might result in a "demand vacuum" for longer-maturity bonds that pushes yields higher and tightens financial conditions.

"The Fed is regaining their inflation credibility, slowly. As they get inflation closer to the target, their long-run rate will again serve as a credible anchor for yields."

The divide between investors with trillions at stake reflects just how tough monetary policy itself has become, as price pressures remain high and readings of headline and underlying inflation send mixed signals.

From Japanese pensions and life insurers to foreign governments and U.S. commercial banks, where once they were lining up to get their hands on U.S. government debt, most have now stepped away.

Yields are swinging wildly in the market that's the 'lifeblood of our national economic security,' putting the Fed in a bind between shoring up the Treasuries market and continuing to battle inflation.

$4.6 trillion is currently sitting in U.S. money-market mutual funds, with another $150 billion in ultra-short bond funds.