Since the Treasury Borrowing Advisory Committee (TBAC) last convened in late July, there have been notable changes in Treasury yields. The Federal Reserve's policy rate reduction of 50 basis points in September led to a decline in 2-year Treasury yields by about 30 basis points. However, stronger job reports in September caused an increase in yields, leaving the 10-year yield at approximately 4.25%, unchanged from late July.
A shift has occurred from concerns over inflation risks to potential employment issues. Inflation peaked at 3.7% in April but slowed to 2.0% by August, with broad decreases across goods and services. Despite this, shelter inflation remains high, though new rents are slowing.
Economic activity is advancing steadily, supported by consumer spending, while the manufacturing sector is contracting. Housing activity has softened significantly with existing home sales reaching their lowest level since 2010.
Labor market data has become crucial for Treasury markets as inflation risks diminish. Preliminary revisions indicated that nonfarm employment was overestimated by 818k as of March 2024. The unemployment rate rose to 4.25% in July and remained at 4.22% in August.
The US dollar experienced depreciation against other currencies due to expectations of rapid Federal Reserve easing and heightened market volatility in early August.
In light of these developments, TBAC reviewed Treasury’s November Quarterly Refunding Presentation and noted a borrowing estimate of $546 billion for Q1 FY2025 and $823 billion for Q2 FY2025 under certain conditions.
The committee also discussed several topics including buybacks, market resilience efforts by the Inter-Agency Working Group on Treasury Market Surveillance (IAWG), digital assets' impact on the Treasury market, and tokenization of US Treasuries.
For the upcoming quarter, TBAC recommended keeping nominal coupon auction sizes unchanged while increasing TIPS auctions slightly.
Finally, the committee highlighted risks associated with debt limit constraints that could affect financial markets and US credit ratings if unresolved.
"Respectfully," concluded Deirdre K. Dunn, Chair of TBAC, along with Vice Chair Mohit Mittal.
