Since the Treasury Borrowing Advisory Committee (TBAC) last convened in November, U.S. Treasury yields have remained stable. The committee’s latest report to the Secretary of the Treasury highlights that while domestic fixed-income markets saw little change, a sharp increase in Japanese government bond yields during January affected global markets. Equity prices continued their upward trend, with the S&P 500 rising 16% over the past year. Credit spreads remain tight and volatility measures such as the VIX are near multi-year lows.
The report notes increased volatility in currency and commodity markets. The U.S. dollar experienced a sharp depreciation against major currencies in late January before partially recovering. Gold and silver prices rose significantly over the past year but fell recently as the dollar strengthened, possibly due to changes in margin requirements. Copper prices have climbed 21% over three months, while oil prices increased modestly amid geopolitical tensions.
Economic data releases were delayed or distorted by the October-November 2025 government shutdown, particularly affecting inflation statistics from the Bureau of Labor Statistics (BLS). The BLS was unable to produce an October CPI inflation report, leading to artificially low inflation readings for that period.
In late 2025, short-term interest rates suggested reserve balances might be falling below desired levels for ample liquidity. The Federal Reserve ended balance sheet reduction on December 1 and began purchasing $40 billion per month in Treasury bills through Reserve Management Purchases (RMPs) starting December 12 to maintain reserves without significantly impacting longer-maturity yields.
President Trump announced plans in early January for Fannie Mae and Freddie Mac to purchase $200 billion of mortgage-backed securities to help lower mortgage rates for new homebuyers. This move represents a small share of total MBS outstanding but is significant relative to expected net supply for 2026.
After three consecutive rate cuts at Federal Open Market Committee meetings in late 2025, policy rates were left unchanged in January. Chair Powell indicated further cuts could occur if inflation slows or labor markets weaken further. Markets anticipate less than 50 basis points of additional rate cuts this year. President Trump’s nomination of Kevin Warsh as Fed Chair did not cause significant market reaction.
U.S. economic activity expanded strongly in 2025 and is expected to continue growing this year, supported by consumer spending and business investment related to artificial intelligence technologies. However, housing remains weak due to high prices and mortgage rates, with single-family housing starts declining recently.
Job growth has slowed more than other economic indicators; private nonfarm payroll additions averaged just 29,000 per month during late 2025 while unemployment held steady at 4.4%. Reduced immigration flows and slower labor force growth have lowered the breakeven pace needed to keep unemployment from rising.
Inflation remains above target levels with core PCE at 2.8% year-over-year as of November; goods price inflation persists due to tariff-related costs while services inflation has eased thanks to slower shelter price increases.
Investor focus remains on supply-demand dynamics for U.S. Treasury securities and how tariff revenues affect deficit projections—especially given an upcoming Supreme Court decision regarding International Emergency Economic Powers Act tariffs that could impact future revenue streams.
The TBAC reviewed quarterly receipts and outlays along with primary dealer feedback about potential issuance of a Secured Overnight Financing Rate (SOFR) Floating Rate Note (FRN). Most committee members agreed there is sufficient demand among various investor groups—including money market mutual funds—for additional FRN issuance and found SOFR FRNs advantageous especially for smaller banks from operational perspectives.
The committee also discussed how Federal Reserve policy shifts should influence decisions about privately-held versus total Treasury debt composition when setting issuance strategy—emphasizing that inflection points may present opportunities for cost- and risk-efficient adjustments within established frameworks.
Investor demand trends show a shift since 2022 from Federal Reserve holdings toward more price-sensitive investors such as money market funds, exchange-traded funds, banks, broker-dealers, and foreign private sector entities. Demographic changes may support future demand through higher fixed-income allocations among older households; stablecoins are seen as another source of short-end demand.
While overall demand for Treasuries appears healthy, some members noted changing diversification benefits: Treasuries’ correlation with equities has been positive at times during high-inflation periods—a shift from their traditional countercyclical role—which could affect certain investor segments’ appetite for these securities.
The committee recommended keeping auction sizes unchanged across nominal coupon bonds, FRNs, and TIPS but anticipates possible increases in coupon issuance by fiscal year 2027 depending on projections. They discussed tradeoffs between gradual versus accelerated auction size increases should financing needs rise and stressed clear communication with market participants throughout any adjustment process.
“Respectfully,
Deirdre K Dunn
Chair, Treasury Borrowing Advisory Committee
Jason S Granet
Vice Chair, Treasury Borrowing Advisory Committee”
