TBAC CHARGE

“In the May 2023 quarterly refunding announcement, Treasury indicated it may need to modestly increase auction
sizes as early as the August 2023 refunding announcement. If Treasury begins increasing coupon issuance, in
which tenors and sectors should Treasury change auction sizes? Do certain tenors or sectors show greater
demand or capacity for increased auction sizes than others? How should the outlook for Treasury bill demand
affect Treasury’s approach to increasing coupon issuance?”

2
Executive Summary
This presentation addresses a variety of considerations that Treasury should assess when determining how and where they
increase issuance to meet future financing needs:
• Optimal Treasury Debt Structure Model refreshed for current market conditions, including additional analysis under different
term premium scenarios
‒ Highlights the increased cost to Treasury relative to 2019 and 2022 updates
• Demand for coupon Treasuries, through a review of Treasury auction performance across tenors
‒ Highlights generally strong auction demand; however secondary market conditions warrant some caution around increasing
7y and 20y auction sizes relative to other tenors
• Current market functioning
‒ Examines relative volume metrics, market depth as well as secondary market pricing efficiency across tenors
• Demand for increased Bill issuance for remainder of the year
‒ Highlights that Money Market Funds are well positioned to absorb the expected issuance
• Different issuance scenarios
‒ Shows how WAM, TIPS and Bills-share evolves across various issuance scenarios

Key findings from the analysis include:

• Treasury should increase coupon issuance across the curve, including in TIPS
• Some tenors exhibit better liquidity and support in the secondary market, including 5s, 10s and 30s, and should be considered
to absorb a higher percentage of issuance increase than other tenors, such as 7s and 20s
• If TIPS share is increased at a rate of 1bn per auction, TIPS share will decline below the TBAC recommended range. Higher
increases in TIPS issuance will be needed to maintain TIPS share in 7%-9% range. Further study to consider options like
adjustment in TIPS calendar schedule to accommodate higher total issuance could be helpful

3
Optimal Treasury Debt Structure Model and Term Premium Considerations

4
 Optimal Debt Structure Model* – Comparison as of 2023 vs 2019 of
Macroeconomic and Fiscal Variable Behavior Model Projections
• After an initial COVID induced dislocation, major macro-economic variables (Unemployment gap, Real GDP, Core
PCE) revert to the pre-COVID trend
• The 2023 projection anticipates significantly higher deficits compared to the 2019 projection due to the significant
fiscal expansion during COVID

* Refer: https://w ww.brookings.edu/articles/optimizing-the- maturity-structure-of-u-s-treasury-debt/

* https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ32022.pdf
5
Optimal Debt Structure Model – Comparison as of 2023 vs 2019 of Model Rate
Projections
• Different initial conditions have a strong effect on the path of main variables in the model, but terminal distributions
are similar

• Cost and variability of each issuance strategy depends upon the entire path. So it is important to note the
significantly different evolutions implied by the two sets of initial conditions

• While these macroeconomic and rates models are useful for analyzing long term effects of debt management
decisions, they are not sophisticated forecasting models and these outputs should not be understood as taking a
meaningful view on the near-term outlook for either rates or the economy

6
Model Output: Comparisons as of 2019, 2022, and 2023 of Model Cost and
Volatility for Each Individual Security that Treasury Issues
• Single security issuance model output has been shifting up and to the right over the past several years (i.e. more
cost and more volatility), primarily due to increased size of the stock of Treasury Debt

7
Efficient Frontiers and Historical Issuance
• Efficient frontiers are calculated by comparing the trade-off
between debt service costs and the volatility in the size of
the deficits over time

• Here we compare the model efficient frontier using

macroeconomic and fiscal environments observed at the
end of 2019Q4 (blue line), to those observed at the end of
2023Q1 (red line)

• The efficient frontier has moved up (higher cost) and to

the right (higher volatility). This is largely driven by change
in fiscal environment

• The blue and the red dots in the upper right represent
Treasury’s issuance kernel as of 2019Q1 and 2023Q1
respectively. The degree to which issuance lies off the
model efficient frontier has remained about the same

• The graph on the lower right shows the efficient frontier

using the macroeconomic environment in 2019Q4, but
fiscal environment from 2023Q1. To do this, we use debt
stock from 2023Q1 shifted back 17 quarters and rescaled
to nominal GDP. We also use the primary deficit as
percentage of GDP from 2023Q1

• The modified 2019Q4 frontier lies almost on top of the

2023Q1 frontier, implying that most of the difference in the
frontiers is attributable to the shift in fiscal environment

8
Term Premium
• While historically Term Premium (TP) has tended be positive, more recently ACM and KW models TP has stayed negative
• The ACM TP Model shows that even after making a 1 StdDev adjustment higher to the current TP level, TP would still be flat to negative
• Kim-Wright (KW) model shows that most of the decline in TP is coming from decline in real term premium
• If one measures TP as difference between current 10y and average expected FF rate over the next 10 years then, based upon the NY
Fed dealer survey*, TP has been positive and moved higher more recently
• TP is an important variable for Optimal Debt Structure Model. Note, there are many factors that have played a role in lower TP. It could
move higher from levels seen in last 10y years given increase in aggregate debt outstanding, potential increase in inflation risk premium
and if QE programs are less ambitious during future downturns

5 5Y ACM Term Premium and Standard Deviation 5y KW Term Premium Model (Decomposed into
4 Real and Inflation Components)
3 2
1.5
2 1
%

1 0.5

%
0
0 -0.5
-1 -1
-1.5
-2 -2
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

TP+1SD TP TP-1SD TP TP (Real) TP (Inflation)

10Y ACM Term Premium and Standard Deviation 10y KW Term Premium Model (Decomposed into
8 Real and Inflation Components)
6 3

4 2

2 1
%

0 0

-2 -1

-4 -2
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Source: Presenting Member Data TP+1SD TP TP-1SD TP TP (Real) TP (Inflation)

* Refer Q2b under https://www.newyorkfed.org/medialibrary/media/markets/survey/2023/jun-2023-spd-results.pdf
9
Term Premium Across 2y, 10y, and 30y Tenors, Using Standard and Lower TP
Assumptions

10
Sensitivity of Model Cost and Volatility for Lower Term Premium Scenarios
• In the plots below, we show outputs as of 2023 using the standard model assumption, and then scenarios if 10y term premium is 25bps
or 50bps lower than the standard assumption (with term premium for rest of the curve adjusted per the Model)
• Model continues to favor belly issuance under lower term premium assumptions, but also shows a significant reduction in the relative
cost of longer-dated issuance in the lower term premium scenarios

11
Efficient Frontier under Lower Term Premium (TP) Scenarios
• Under lower Term Premium scenarios, current issuance kernel moves further away from the efficient frontier. This is
because a sustained reduction in Term Premium would call for more issuance further out the curve

Base TP10 Down 25 TP10 Down 50

12
Insights for Future Issuance
• Fundamental conclusions remain similar to Q3-2022 TBAC study. The model continues to favor more belly,
Bill, TIPS and FRN issuance, and favors increasing issuance less in the longer end relative to the current
issuance mix

• When risk is measured as volatility in the deficit (right chart), increasing TIPS issuance is a small
positive, as it lowers expected cost and does not increase risk (hence, it moves the issuance pattern
closer to the efficient frontier)

• When risk is measured by the variation in funding costs (left chart), expected cost can only be
reduced if more risk is assumed. However, that trade-off appears reasonably attractive, especially if
achieved by increasing belly issuance

13
Insights for Future Issuance under Lower Term Premium Scenarios
• Increasing issuance of longer maturities reduces both volatility of debt service costs as well as volatility in
the size of future deficits. This doesn’t increase debt service costs significantly, especially when
considering scenarios assuming reduced future term premium
Base TP10 Down 25 TP10 Down 50

14
Sensitivity of Model Cost and Volatility for Higher Term Premium Scenarios
• In the plots below, we show outputs as of 2023 using the standard model assumption, and then scenarios if 10y term premium is 25bps
or 50bps higher than the standard assumption (with term premium for rest of the curve adjusted per the model)
• Model continues to favor belly issuance under higher term premium assumptions, and also shows a significant additional increase in
the relative cost of longer-dated issuance in the higher term premium scenarios

15
Efficient Frontier Under Higher Term Premium Scenarios
• Under higher Term Premium scenarios, the current issuance kernel is even closer to the efficient frontier, suggesting
proportionate increases in future debt issuance if this is the expected future term premium

Base TP10 Up 25 TP10 Up 50

16
Demand Assessment

17
Auction Statistics over Time
• Customer takedown trending higher over past decade across all sectors points to broadly robust demand for
issuance
• Less variability in bid-to-cover among tenors over the past decade points to a more balanced demand picture

Customer Takedown per Tenor (Average per Year) Customer Takedown per Tenor (Average per Year)
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
2009 2011 2013 2015 2017 2019 2021 2023 2009 2011 2013 2015 2017 2019 2021 2023

2 3 5 7 10 20 30 TIPS

Bid-to-Cover (Average per Year) Bid-to-Cover (Average per Year)

2 3 5 7
10 20 30 TIPS
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0 1.0

0.5 0.5

0.0 0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: Bloomberg Source: Bloomberg

18
Auction Allotment over Time
• Dealer participation in issuance has steadily
All Issuance Excluding Bills
declined over the past decade
100%
90%

• Increased percentage of supply is being absorbed 80%

by investment funds while foreign participation has 70%

remained range bound 60%
50%
40%
• Increased reliance on investment funds implies: 30%
‒ Larger tails when those funds are less 20%
enthusiastic to provide liquidity 10%

‒ Stops way through the pre-auction levels when 0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
those funds are motivated to buy
Depository Individuals Dealers Pension Investment Foreign Other
institutions and and funds and
brokers Retirement international
funds and
Ins. Co.

Source: Treasury

19
Auction Allotment over Time – Split by Tenor
2s 5s
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Depository Individuals Dealers Pension Investment Foreign Other Depository Individuals Dealers Pension Investment Foreign Other
institutions and and funds and institutions and and funds and
brokers Retirement international brokers Retirement international
funds and funds and
Ins. Co. Ins. Co.

3s 7s
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Depository Individuals Dealers Pension Investment Foreign Other Depository Individuals Dealers Pension Investment Foreign Other
institutions and and funds and institutions and and funds and
brokers Retirement international brokers Retirement international
funds and funds and
Ins. Co. Ins. Co.
Source: Treasury

20
Auction Allotment over Time – Split by Tenor
10s 20s
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023

Depository Individuals Dealers Pension Investment Foreign Other Depository Individuals Dealers Pension Investment Foreign Other
institutions and and funds and institutions and and funds and
brokers Retirement international brokers Retirement international
funds and funds and
Ins. Co. Ins. Co.

30s
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Depository Individuals Dealers Pension Investment Foreign Other

institutions and and funds and
brokers Retirement international
funds and
Ins. Co.
Source: Treasury

21
Historical Auction Tails
• On average, auctions have cleared very close to Average Tail (+=Tail)
pre-auction levels indicating the market is well
suited at time of auction to take down supply 2

• COVID-related fiscal increases in 2020-2021

resulted in larger auction sizes, but Fed buying also
1.5
increased, absorbing much of that issuance
• More recently, as the Fed is reducing balance
sheet, auctions have continued to clear in line with 1
pre-auction yields but that has coincided with a
modest reduction in auction sizes

bps
0.5
• It remains to be seen how auctions will perform
as issuance sizes increase while the Fed
continues to reduce balance sheet 0
2y 3y 5y 7y 10y 20y 30y
• The auction process can demonstrate unintuitive
results: -0.5
• 20y auctions have averaged well through the
deadline yield, pointing to the market using the
-1
auction as a liquidity event Tenor
• While 10s are the most liquid coupon in the
2009 2010 2011 2012 2013 2014 2015 2016
secondary market, they have cleared on average
at a small tail more recently. This shouldn’t be 2017 2018 2019 2020 2021 2022 2023

interpreted as a lack of demand in the 10y sector, Source: Presenting Member Data
rather that investors are less reliant on the
auction process to source liquidity for 10s

22
Intraday Performance Before and After Auction
• 2s/3s/5s have shown a propensity over time to require
an intraday concession to clear supply Concession +/-2hrs from Auction Clearing Time
4
• 7s/10s/20s/30s exhibit more mixed performance in the
3
hours surrounding the auction
2
• Similarly, auctions seem to be good liquidity events for
1
20s and 30s as evidenced by negative concession and
negative tails on average 0

bps
-1
• Both intraday performance and tail data generally
demonstrate that there is consistent strong demand for -2

Treasury auctions -3

• The small tail and intraday concession in the 10y both -4

likely indicate that there is less need for end users to -5

tap auction liquidity in this sector. Secondary liquidity
and relative valuation metrics both point to healthy -6
2y 3y 5y 7y 10y 20y 30y
end-user demand for the 10y sector Tenor

• Auction statistics and concessions are just a few of the 2009 2010 2011 2012 2013 2014 2015 2016

many metrics to consider when evaluating issuance, 2017 2018 2020 2020 2021 2022 2023

and should be observed in the context of overall *Source: Presenting Member Data
*Total gross concession in the 2hrs preceding auction and 2hrs post auction
valuations and secondary liquidity Higher the number, more the intraday concession required to clear supply

23
Relative Value Considerations Using Swap Spreads
• Duration neutral swap spread butterflies indicate that:
2s3s5s Matched Maturity Asset Swap Spread
• On-the-run 7s have generally been cheap vs 5s and
Fly
10s
15

10
• On-the-run 20s have generally been cheap vs 10s Avg
5
and 30s
0

bps
• On-the-run 3s could be somewhat volatile locally -5

relative to 2s and 5s but have not exhibited -10

consistent cheapness as exhibited by 7s and 20s -15

-20
-25
May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23

5s7s10s Matched Maturity Asset Swap 10s20s30s Matched Maturity Asset Swap
Spread Fly Spread Fly
0 0 Avg
-2 this is w hen 20y auction sizes
Avg -10 dropped to current steady
-4 state of 15bn/12bn/12bn
-20
-6
bps

bps
-8 -30
-10
-40
-12
-50
-14
-16 -60
May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23 May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23

Source: Riskval; Fly weights: -1/2/-1; more negative the number cheaper the belly vs wings

24
Relative Value Considerations Using Cash Butterflies
• Duration neutral butterflies support the assessment from 2s3s5s Duration Neutral Treasury Butterfly
the swap spread analysis : Yield
40
• On-the-run 7s have generally been cheap vs 5s and 30
Avg
10s. More recently 7s have normalized on the 20
5s7s10s fly, but they are at the rich end of their history 10
0

bps
• On-the-run 20s have generally been cheap vs 10s -10
and 30s -20
-30

• On-the-run 3s have no discernable cheapness vs 2s -40

and 5s -50
May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23

5s7s10s Duration Neutral Treasury Butterfly 10s20s30s Duration Neutral Treasury Butterfly
Yield Yield
20 90
Avg Avg
80
15 70
60
10
50
bps

bps
40
5
30

0 20
10
-5 0
May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23 May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23

Source: Riskval; Fly duration weights: -1/2/-1; more positive the number cheaper the belly vs wings

25
Relative Value Considerations Across Broad Curve Segments
• Swaps spreads have materially declined post the GFC (USTs 30y Swap Spreads vs Fwd Looking Total
cheapened). The swaps spread curve trades very inverted – UST Coupon Issuance(Pre & Post 2009)
curve steeper than swap curve
80

• There are structural reasons behind demand for off-balance sheet 60

R² = 0.5142
40

Swap spreads (bps)

long duration needs. There is no indication of this dynamic 20
disappearing. The decline in long end swap spreads is more likely a 0
function of the off-balance sheet supply/demand imbalance, rather -20 0 500 1000 1500 2000
than an indication of excessive Treasury supply -40
-60
-80
• Swap spreads have become significantly less correlated to Treasury -100
R² = 0.0018

supply. -120
6M Forward looking coupon issuance in $bln (10y
equivalents)
• Refer to Q-1 2021 TBAC charge* for a more detailed discussion on
swap spread dynamics Source: JP Morgan Research Pre 2009 Post 2009
SOFR swap spreads prior to 2019 are estimated using post-2019 relationship between SOFR &
OIS swap spreads and historical OIS swap spreads.
Above chart assumes that Treasury is transparent with their refunding needs and that 6M look
ahead expectations are mostly in line with actual subsequent issuance
Spread of Libor Swap Curve to Treasury Curve Spread of SOFR Swap Curve to
200 Treasury Curve (More Recent History)
30
150
10
100
-10
bps

50

bps
-30
0
-50
-50 -70

-100 -90
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Nov-22 Apr-23

2y 5y 7y 10y 30y 2y 5y 7y 10y 20y 30y

Source: Bloomberg
* https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ12021.pdf(page 68 onwards)
26
Assessing Market Demand Using Trading Volumes Relative to Auction Size
• While 5s and 10s constitute >50% of trading volumes, they only make up 31% of annual issuance

• On the other hand 7s and 20s constitute only 11% of trading volumes, while they make up 21% of annual issuance

• Pension and Insurance investors, who tend to trade less frequently, have a bigger footprint in longer tenors than
shorter on the curve. Additionally, 30y on-the-run trading volumes are distorted lower relative to shorter on-the-run
tenors because 30y corporate bonds are traded off of once-old 30yrs, while shorter tenor corporates are traded off of
on-the-run issues

• 5s and 10s are preferred hedging points for IG and MBS community, garnering more volumes

• The trading volume data suggests there is capacity for Treasury to concentrate more of its issuance in 5s, 10s, and
30s, while making smaller increases in issue sizes of 7s and 20s
Trading Volumes and Issuance Split Across
Benchmark Points (Jan2022- May2023)
Treasury Volume Treasury Issuance Trading $/ Issuance $*
2s 16% 18% 31
3s 13% 17% 26
5s 29% 18% 54
7s 8% 15% 18
10s 23% 13% 58
20s 3% 6% 15
30y 6% 8% 27
5y TIPs 1% 2% 15
10y TIPs 1% 3% 9
30y TIPs 0.2% 1% 12
* Based on on-the-run trading volumes during the period (TRACE data)

27
TIPS Discussion
• TIPS share is currently 7.6%. Under current auction sizes, TIPS
share declines further - driven by original issue 20y TIPS maturing
in the coming years. TIPS share generally declines further during
recessions TIPS Share of Marketable Debt
12%
• Investor demand, especially for shorter duration TIPS, has
increased over past decade. However, more recent data is 10%
showing outflows from such funds which could indicate a less 8%
favorable backdrop relative to the prior two years for a larger
increase in TIPS issuance 6%

4%
• The growth of Target Date Funds (TDFs) continues to add to TIPS
demand, with an estimated 2% allocation to TIPS 2%

0%
• TBAC charges from Q2 2023* and Q4 2021** discuss TBAC’s 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
assessment of recommended TIPS share and demand
assessment. Treasury should also further explore options like NBER Recessions TBAC Recommended TIPS Share
adjustment in TIPS calendar schedule and sizes to incorporate TIPS Share of Marketable Debt
larger total TIPS issuance as total Treasury debt increases
Target Date Funds Assets Under
TIPS Assets Under Management Management ($B, log scale)
350 10,000

300 3,197

250 1,000

200
$bn

150 100

100

50 10

0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
1
Short-dated TIPS Broad TIPS 1999 2002 2005 2008 2011 2014 2017 2020 2023
Source: Morningstar; Above AUM only includes dedicated TIPS funds
* https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ22023.pdf
** https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ42021.pdf 28
Market Functioning and Liquidity Analysis

29
Market Functioning – Market Depth
• Even with a modest improvement relative to 2022, 10y Market Depth vs 3m10y Daily Implied Vol
market depth remains lower versus pre-COVID period, 350 0
pointing to somewhat tighter liquidity conditions 300
1
2

mkt depth ($mm)

• 250

daily vol (bps)

Market depth is generally a function of volatility. When 3
4
volatility is elevated market depth is generally shallow 200
5
150 6
• As issuance has picked up post-COVID, market depth 100 7
as percentage of issuance has receded 50
8
9
0 10
2010 2012 2014 2016 2018 2020 2022

10y cash market depth 3M MA (LHS)

Implied daily volatility from 3m10y swaption market in basis points RHS (Inverted)

10y Market Depth vs 10y Auction Size Ratio of 10y Auction Size to 10y Market Depth
350 45 600

Issuance per unit mkt depth

300 40
500
auction size ($bn)
35
mkt depth ($mm)

250
30 400
200 25
300
150 20
15 200
100
10
50 100
5
0 0 0
2010 2012 2014 2016 2018 2020 2022 2010 2012 2014 2016 2018 2020 2022

10y cash market depth 3M MA 3M MA 10y auction size Ratio

Source: JPM DataQuery

Market depth: cash market depth is the average of the top 3 bids and offers on hot-run Treasuries in the inter-dealer broker CLOB, averaged between 8:30am ET and 10:30am ET daily

30
Market Functioning – UST Yield Error vs Spline
• Local dislocations, as measured by yield error vs fitted
spline, have come down from peak levels observed in
2022 but remain wider than the pre-COVID period Average Yield Error vs Spline (>1y USTs)
5.0
• Yield error vs spline, sector comparison: 4.5
4.0
3.5
• If we look at different maturity sectors, yield errors (mkt vs 3.0

bps
fitted spline) are more stretched in the front end of the curve 2.5
2.0
than the very long end of the curve (with the exception of the
1.5
20y sector) 1.0
• Due to aged issues rolling down, there are more issues with 0.5
0.0
wider range of coupons and issue size per maturity window as 2010 2012 2014 2016 2018 2020 2022
time to maturity shrinks, i.e. there are more issues per sector
in the 0-7yr range than the 7y+ range Source: Bloomberg

• 20y sector continues to exhibit higher yield error even as yield

error has improved vs last year

Average Yield Error vs Spline Split by Sector Average Yield Error vs Spline Split by Sector
4.0 5.0
3.5 4.5
4.0
3.0
3.5
2.5 bps 3.0
bps

2.0 2.5
2.0
1.5
1.5
1.0 1.0
0.5 0.5
0.0
0.0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: Barclay s research Source: Barclay s research 6-11y 11-21y 21y+

0.5-2y 2-3y 3-6y

31
Market Functioning – Bid-Ask Spreads
• At the start of the year, bid-ask spreads widened to
levels similar to those experienced during pandemic Duration Weighted Bid-Ask Across Tenors
stress. Bid-ask spreads are off the highs of the year but 0.7
still elevated vs pre-COVID levels
0.6

• Both yield error vs spline and bid-ask spread data 0.5

suggest that the 7y and 20y are more challenged than
0.4
other points on the curve

bps
0.3

0.2

0.1

0.0
2016 2017 2018 2019 2020 2021 2022 2023
Source: Barclays Research

Bid-Ask Spreads for On-the-Run Bid-Ask Spreads for On-the-Run 7y/10y Bid-Ask Spreads for On-the-Run
2y/3y/5y Notes Notes 20y/30y Bonds
0.8 1.2 0.8
0.7 0.7
1
0.6 0.6
0.8
0.5 0.5

bps
bps
bps

0.4 0.6 0.4

0.3 0.3
0.4
0.2 0.2
0.2
0.1 0.1
0 0
0
2016 2017 2018 2019 2020 2021 2022 2023 2016 2017 2018 2019 2020 2021 2022 2023
2016 2017 2018 2019 2020 2021 2022 2023
7y 10y 20y 30y
2y 3y 5y
Source: Barclays Research Source: Barclays Research Source: Barclays Research

32
Assessment of Market Functioning
• Market conditions can sustain additional coupon issuance increases but metrics such as relative value and bid-ask
spreads warrant caution when increasing auction sizes more meaningfully in 7s and 20s and also favor relative
increases in 5s, 10s and 30s

• Treasury market liquidity is driven by many factors: exogenous ones like elevated uncertainly in the macro outlook
causing higher realized volatility, as well as micro ones such as aggregate dealer balance sheet size relative to the
overall US Treasury market and a lack of true all-to-all platform

• Measures of liquidity such as market depth, yield error, and bid-ask spreads have improved from their most stretched
metrics in 2022 but have not returned to their pre-COVID levels

• Trading and liquidity conditions are hard to gauge precisely. In periods of stress, intermediation demand has
sometimes exceeded capacity. Treasury should remain vigilant, but we do not see an issue with market functioning
at present as it pertains to increases in Treasury coupon issuance

* https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ22022.pdf
33
Bills Discussion

34
Bills – Ownership Breakdown
• Over the last two years the biggest migration has been from Govt MMF to “Other” which is a catchall for a variety of
participants including individuals, investment funds, and corporate treasury accounts

T-Bill Ownership as of 3/31/23 T-Bill Ownership 3/31/21

Foreign Other Prime MMF Foreign Other Prime MMF

Govt MMF Primary Dealers Fed Govt MMF Primary Dealers Fed
Local Govts Stablecoins Offshore MMF Local Govts Stablecoins Offshore MMF

Source: JPM research, Cranes data, TIC data, Federal Reserve Bank of New York, Fitch, Company 10-Qs and other disclosures

35
Bills – Recent Demand
• Since the debt ceiling resolution, the inflow of recent Bills as % of Total UST Outstanding
T-Bill issuance has been well absorbed
35%

• Money Market Funds (mainly Government Only 30%

MMFs) have been supportive of absorbing this new 25%
issuance (uptick from near low % of ownership of
20%
bills outstanding)
15%
• MMFs likely to help absorb the estimated additional 10%
$250bn-$800bn bill supply over the second half of 5%
2023. Currently Gov MMFs ~500bn under their
0%
average UST holdings as % of AUM 1996 1998 2000 2003 2005 2007 2010 2012 2014 2017 2019 2021

Cumulative Net T-Bill June through

US Tsys as % of Gov MMF AUM December (Realized and Expected*) High
70% ($1562bn)
1600
60%
1400
50%
1200

Cumulative Net Bill ($bn)

40%

30% 1000
Low
20% ($1045bn)
800
10%
600
0%
2012 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
400
UST Debt Average
200

Source: IMoneyNet, Bank of America Research, Bloomberg, committee member data, committee member dealer survey 0
*committee member dealer survey 31-May 30-Jun 31-Jul 31-Aug 30-Sep 31-Oct 30-Nov 31-Dec

Cumulative Net Bill ($bn) Low High

36
Bills – MMF Capacity and WAM
• Government only MMFs have gradually lengthened WAM
over the course of 2023, but are still well below the historical Money Market Fund WAMs
average of about 30.5 days WAM
60
• The bills absorbed by MMFs since debt ceiling resolution 50
have largely been funded by reductions in ON RRP 40

days
30

• As MMFs perceive that we are nearing the end of the Fed’s 20

10
hiking cycle, they have capacity to increase both their WAM 0
and their allocation to bills to more historically typical levels. If July-18 July-19 July-20 July-21 July-22 July-23
MMFs move back to their average WAM while buying bills WAM 15 Largest RRP Counterparties (Days)
with an average tenor of 85 days, they would need to need to
5y Average (30.5 Days)
buy ~$600bn* (estimated by extrapolating capacity of Top 15
RRP Counterparties based upon their share of AUM)
MMF AUM ($bn) 5458
Top 15 RRP Counterparty AUM ($bn) 2519
Top 15 RRP Counterparty RRP ($bn) 1192 MMF AUM and RRP
Current WAM 21
6000 60%
Average WAM 30
Max WAM 48 5000 50%
4000 40%

$bn
Days to Add for Top 15 RRP Counterparties 3000 30%
$bn to Buy 4 8 12 16 20 24 28
2000 20%
75 134 269 403 537 672 806 940
Issuance WAM (days)

80 126 252 378 504 630 756 882 1000 10%

85 119 237 356 474 593 711 830 0 0%
90 112 224 336 448 560 672 784 July-18 July-19 July-20 July-21 July-22 July-23
95 106 212 318 424 530 636 742
RRP (LHS, $bn) MMF AUM (LHS, $bn)
100 101 202 302 403 504 605 705
105 96 192 288 384 480 576 672 RRP/MMF AUM (RHS, %)
*Current WAM of Issuance ~84 Days/Week excluding 52-Week
**Top 15 RRP Counterparties represent ~46% of MMF AUM as of May 31st
Source: Cranes data, Bloomberg
*The grid represents how much of Y tenor the top 15 RRP counterparties would need to buy to achieve an increase in X days ofWAM. These top 15 RRP counterparties make up ~46% of total MMF AUM. To add 10 days of WAM, they would need to buy
~300bn 85 day bills. Extrapolating that across the entire MMF complex indicates roughly double that for a 10 day increase.

37
Bills – Valuation Sensitivity to Issuance Changes
• 3m Bills spread to 3m OIS shows very little sensitivity to
issuance changes Change Bills Outstanding vs Change 3m
Bill OIS
• In 2020 when issuance went up ~2.5T, 3m bills widened 20

~10bps to 3m OIS 15

10
• During the 2022 aggressive hiking cycle, bills remained rich
to what the market was pricing for Fed action 5

bps
-
• Net, there appears to be sufficient demand from MMFs to (5)
-500 0 500 1000 1500
further increase Bills supply slated for rest of the year. Over y = -8E-05x + 0.0012
R² = 0.1053
the medium to longer term, Bills issuance should be looked (10)

at in context of overall WAM as well as Bills as a percentage (15)

of Treasury Debt Outstanding, generally staying within the (20)
TBAC recommended range of 15-20% bill share $bn

Bills Out vs 3m Bill - 3m OIS

6000 50

5000 40

30
4000
20
$bn

bps
3000
10
2000
0
1000 -10

0 -20
2013 2014 2015 2017 2018 2019 2020 2021 2022

Bills Out 3m OIS - Bill Spread

Source: Bloomberg

38
Issuance Scenarios

39
Issuance Scenarios
We analyze different issuance scenarios to better understand the impact on WAM, Bills share & TIPS share

• Baseline - Status Quo Scenario where issuance increases in line with the TBAC recommendations to the
Treasury from Q2-2023* and then stays static

• Scenario 1: Neutral Issuance Scenario – Coupon issuance increases proportionately along the curve including in
TIPS with smaller increase in 7s and 20s with the objective of keeping bills in the 15-20% range long term. Under
this scenario, we incorporate the need to increase coupon issuance across the curve as demonstrated by the
output of Status Quo. We take into consideration concerns about the relative liquidity of 7s and 20s by increasing
those sectors proportionately less vs surrounding sectors

• Scenario 2: Longer Tenors – Here we incorporate the history suggesting that term premium could be less steep
than assumed in the Optimal Debt Structure Model & increase issuance in longer tenors while reducing issuance
in shorter tenors proportionately. Per the output of the Optimal Debt Structure model, this reduces deficit volatility
while incurring only a small increase in cost

• Scenario 3: Shorter Tenors – Here we adopt a strategy focused on cost minimization & increase issuance in
shorter tenors while proportionately reducing issuance in longer tenors. While expected costs are reduced, this
increases deficit volatility

* https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ32023 -05032023.pdf

40
Issuance Scenarios Details
Status Quo Scenario (in $bn) Status Quo Scenario Increases (in $bn)

10Y TIP

30Y TIP

10Y TIP

30Y TIP
2Y FRN

2Y FRN
5Y TIP

5Y TIP
10Y

20Y

30Y

10Y

20Y

30Y
2Y

3Y

5Y

7Y

2Y

3Y

5Y

7Y
MM YY MM YY

5 2023 42 40 43 35 35 15 21 0 15 0 22 5 2023 0 0 0 0 0 0 0 0 0
6 2023 42 40 43 35 32 12 18 20 0 0 22 6 2023 0 0 0 0 0 0 0 0 0
7 2023 42 40 43 35 32 12 18 0 17 0 24 7 2023 0 0 0 0 0 0 0 0 0 0
8 2023 44 42 45 36 37 16 23 0 0 8 22 8 2023 2 2 2 1 2 1 2 0 0
9 2023 46 44 47 37 34 13 20 0 15 0 22 9 2023 2 2 2 1 2 1 2 0 0
10 2023 46 44 47 37 34 13 20 22 0 0 24 10 2023 0 0 0 0 2 1 2 0 0
11 2023 46 44 47 37 37 16 23 0 15 0 22 11 2023 0 0 0 0 0 0 0 0 0
12 2023 46 44 47 37 34 13 20 20 0 0 22 12 2023 0 0 0 0 0 0 0 0 0

Scenario 1: Neutral Issuance (in $bn) Scenario 1: Neutral Issuance Increases (in $bn)
10Y TIP

30Y TIP

10Y TIP

30Y TIP
2Y FRN

2Y FRN
5Y TIP

5Y TIP
10Y

20Y

30Y

10Y

20Y

30Y
2Y

3Y

5Y

7Y

2Y

3Y

5Y

7Y
MM YY MM YY

7 2023 42 40 43 35 32 12 18 0 17 0 24 7 2023 0 0 0 0 0 0 0 0 0
8 2023 45 43 46 37 38 17 24 0 0 8 22 8 2023 3 3 3 2 3 2 3 0 0
9 2023 48 46 49 39 35 14 21 0 15 0 22 9 2023 3 3 3 2 3 2 3 0 0
10 2023 51 49 52 41 35 14 21 23 0 0 25 10 2023 3 3 3 2 3 2 3 1 1
11 2023 54 52 55 43 41 19 27 0 15 0 23 11 2023 3 3 3 2 3 2 3 0 1
12 2023 57 55 58 45 38 16 24 21 0 0 23 12 2023 3 3 3 2 3 2 3 1 1
1 2024 59 57 60 46 38 16 24 0 18 0 26 1 2024 2 2 2 1 3 2 3 1 1
2 2024 61 59 62 47 43 20 29 0 0 10 24 2 2024 2 2 2 1 2 1 2 1 1
3 2024 63 61 64 48 40 17 26 0 16 0 24 3 2024 2 2 2 1 2 1 2 1 1
4 2024 65 63 66 49 40 17 26 24 0 0 27 4 2024 2 2 2 1 2 1 2 1 1
5 2024 67 65 68 50 45 21 31 0 16 0 25 5 2024 2 2 2 1 2 1 2 1 1
6 2024 69 67 70 51 42 18 28 22 0 0 25 6 2024 2 2 2 1 2 1 2 1 1
7 2024 69 67 70 51 42 18 28 0 19 0 27 7 2024 0 0 0 0 2 1 2 1 0
8 2024 69 67 70 51 45 21 31 0 0 9 25 8 2024 0 0 0 0 0 0 0 1 0
9 2024 69 67 70 51 42 18 28 0 17 0 25 9 2024 0 0 0 0 0 0 0 1 0

41
Issuance Scenarios Details
Scenario 2: Longer Tenors (in $bn) Scenario 2: Longer Tenors Increases (in $bn)

10Y TIP

30Y TIP

10Y TIP

30Y TIP
2Y FRN

2Y FRN
5Y TIP

5Y TIP
10Y

20Y

30Y

10Y

20Y

30Y
2Y

3Y

5Y

7Y

2Y

3Y

5Y

7Y
MM YY MM YY

7 2023 42 40 43 35 32 12 18 0 17 0 24 7 2023 0 0 0 0 0 0 0 0 0
8 2023 44 42 45 36 39 17 25 0 0 8 22 8 2023 2 2 2 1 4 2 4 0 0
9 2023 46 44 47 37 36 14 22 0 15 0 22 9 2023 2 2 2 1 4 2 4 0 0
10 2023 48 46 49 38 36 14 22 23 0 0 25 10 2023 2 2 2 1 4 2 4 1 1
11 2023 50 48 51 39 43 19 29 0 15 0 23 11 2023 2 2 2 1 4 2 4 0 1
12 2023 52 50 53 41 40 16 26 21 0 0 23 12 2023 2 2 2 2 4 2 4 1 1
1 2024 54 52 55 42 40 16 26 0 18 0 26 1 2024 2 2 2 1 4 2 4 1 1
2 2024 56 54 57 43 46 21 32 0 0 10 24 2 2024 2 2 2 1 3 2 3 1 1
3 2024 58 56 59 44 43 18 29 0 16 0 24 3 2024 2 2 2 1 3 2 3 1 1
4 2024 60 58 61 45 43 18 29 24 0 0 27 4 2024 2 2 2 1 3 2 3 1 1
5 2024 62 60 63 46 49 23 35 0 16 0 25 5 2024 2 2 2 1 3 2 3 1 1
6 2024 64 62 65 47 46 20 32 22 0 0 25 6 2024 2 2 2 1 3 2 3 1 1
7 2024 64 62 65 47 46 20 32 0 19 0 27 7 2024 0 0 0 0 3 2 3 1 0
8 2024 64 62 65 47 49 23 35 0 0 9 25 8 2024 0 0 0 0 0 0 0 1 0
9 2024 64 62 65 47 46 20 32 0 17 0 25 9 2024 0 0 0 0 0 0 0 1 0
Scenario 3: Shorter Tenors (in $bn) 10Y TIP
Scenario 3: Shorter Tenors Increases (in $bn)
30Y TIP

10Y TIP

30Y TIP
2Y FRN

2Y FRN
5Y TIP

5Y TIP
10Y

20Y

30Y

10Y

20Y

30Y
2Y

3Y

5Y

7Y

2Y

3Y

5Y

7Y
MM YY MM YY

7 2023 42 40 43 35 32 12 18 0 17 0 24 7 2023 0 0 0 0 0 0 0 0 0
8 2023 46 43 47 37 38 16 23 0 0 8 22 8 2023 4 3 4 2 3 1 2 0 0
9 2023 50 46 51 39 35 13 20 0 15 0 22 9 2023 4 3 4 2 3 1 2 0 0
10 2023 54 49 55 41 35 13 20 23 0 0 25 10 2023 4 3 4 2 3 1 2 1 1
11 2023 58 52 59 43 41 17 25 0 15 0 23 11 2023 4 3 4 2 3 1 2 0 1
12 2023 62 55 63 45 38 14 22 21 0 0 23 12 2023 4 3 4 2 3 1 2 1 1
1 2024 65 57 66 46 38 14 22 0 18 0 26 1 2024 3 2 3 1 3 1 2 1 1
2 2024 68 59 69 47 43 17 26 0 0 10 24 2 2024 3 2 3 1 2 0 1 1 1
3 2024 71 61 72 48 40 14 23 0 16 0 24 3 2024 3 2 3 1 2 0 1 1 1
4 2024 74 63 75 49 40 14 23 24 0 0 27 4 2024 3 2 3 1 2 0 1 1 1
5 2024 77 65 78 50 45 17 29 0 16 0 25 5 2024 3 2 3 1 2 0 3 1 1
6 2024 79 67 81 51 42 14 24 22 0 0 25 6 2024 2 2 3 1 2 0 1 1 1
7 2024 79 67 81 51 42 14 24 0 19 0 27 7 2024 0 0 0 0 2 0 1 1 0
8 2024 79 67 81 51 45 17 29 0 0 9 25 8 2024 0 0 0 0 0 0 0 1 0
9 2024 79 67 81 51 42 14 24 0 17 0 25 9 2024 0 0 0 0 0 0 0 1 0

42
Issuance Scenarios
• If Coupon issuance is not increased beyond 2023Q2
TBAC recommendations, Bills share increases WAM
significantly and WAM declines 82
80
• Bills share exceeds 20% for a period before stabilizing 78
within recommended range in all increased coupon 76

WAM (months)
issuance scenarios but begins to decline below the 74
15%-20% range sooner under Scenario 3 (higher 72
shorter tenor issuance) 70
68
• Without further increases to TIPS auction sizes, TIPS 66
share falls in all issuance scenarios. Stabilizing TIPS 64
issuance within the 7-9% range requires increasing 62
TIPS auction sizes by 2bn at each auction Jul-23 Jan-24 Jul-24 Jan-25 Jul-25 Jan-26 Jul-26 Jan-27 Jul-27

Status Quo Neutral Shorter Tenors Longer Tenors

• Further study to consider options like adjustment in
TIPS calendar schedule to accommodate higher total
TIPS issuance could be helpful
Bills as a %age of Treasury Debt Outstanding TIPS as a %age of Treasury Debt Outstanding
30%

9%
25%

8%
20%

7%
15%

6%
10%
Jul-23 Jan-24 Jul-24 Jan-25 Jul-25 Jan-26 Jul-26 Jan-27 Jul-27
Jul-23 Jan-24 Jul-24 Jan-25 Jul-25 Jan-26 Jul-26 Jan-27 Jul-27
TBAC Recommended Bill Share Status Quo TBAC Recommended TIPS Share Status Quo
Neutral Shorter Tenors Neutral Shorter Tenors
Longer Tenors Neutral+more TIPS (2bln increases)
Longer Tenors

43
Conclusions
• Optimal Debt Structure Model highlights elevated debt service cost, primarily due to increased size of the stock of Treasury
debt
• Model preferences include belly issuance, small TIPS issuance increases, and if lower term premium persists, increases in
longer dated issuance, which would reduce deficit volatility at small incremental costs

• While demand for Treasury issuance remains strong across all tenors, some segments bear watching:
• Cheapness in 7s has reduced recently, but could reemerge as auction sizes increase
• Cheapness in 20s has been persistent and supports lower relative increases in issuance

• Given its funding needs, Treasury should increase coupon issuance in a regular and predictable manner across the curve,
including in TIPS, while making less than proportionate increases in 7s and 20s.(Scenario 1)

• Decline in Term Premium, if it persists, supports additional incremental issuance in longer tenors vs shorter tenors (Scenari o
2). Note, some of the factors that have lead to decline in term premium can reverse

• Treasury should continue to focus on Bills share, TIPS share, WAM and relative sector valuation when analyzing its auction
choices, and will need to make trade-offs recognizing the increase in coupon issuance needed

• TIPS demand has declined somewhat more recently as shorter dated TIPS ETFs have seen outflows. Nonetheless, we think
the market can absorb increases of at least 1bn per auction across TIPS tenors due to generally healthy demand. Further
study to consider options like adjustment in TIPS calendar schedule to accommodate higher total TIPS issuance could be
helpful

• The recent rapid increase in Bills supply has been well absorbed. MMFs have significant room to absorb additional Bills
supply particularly as we approach the late stages of the hiking cycle, when MMFs may find it desirable to extend WAM
toward prior averages, which can be facilitated by adding more Bills

• Market functioning analysis continues to point towards weaker liquidity environment relative to pre-COVID period with
elevated volatility as the largest driver. Treasury should remain vigilant, but we do not see an issue with market functioning at
present as it pertains to increases in Treasury issuance

44