Treasury Issuance and Dealer Balance Sheets

October 30, 2026

Treasury Issuance and Dealer Balance Sheets

Jonathan Glicoes, Lubomir Petrasek, Zack Saravay, and Mary Tian

Primary dealers play an important role as intermediaries in Treasury securities and repo markets, and demand for their intermediation rises on issuance dates. Recent increases in Treasury issuance have raised questions about dealers' capacity to meet this increased demand. This note examines how dealers manage their balance sheets around issuance dates.

In summary, we find that primary dealers take up a sizeable but diminishing portion of Treasury securities issuance at auctions. On average, dealer balance sheets increase on issuance dates by 21 cents for every dollar of Treasury securities issued, and this effect tends to be larger during periods of Federal Reserve balance sheet runoff. About two-thirds of the increase in dealer balance sheets is due to increased demand from clients for Treasury securities financing and the remainder is due to increased Treasury securities inventories. The effects on dealer inventories typically dissipate in three to five days following issuance, but the effects on demand for Treasury financing appear more persistent, leaving a longer-lasting imprint on dealer balance sheets. Issuance reduces spare intermediation capacity at Treasury trading desks by bringing the desks closer to their internal risk limits, suggesting that higher Treasury issuance contributes to increased pressures on dealer balance sheets. Treasury buybacks offset the impact of issuance, reducing dealer inventories and internal risk limit usage at Treasury trading desks.

Role of dealers in primary Treasury securities markets

Primary dealers play an important role in primary Treasury securities markets. They are required to "bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices."¹ Although primary dealers' share of Treasury securities allocation at auctions has decreased over the past decade, they still take up about one-half of Treasury bill issuance and about one-fifth of the issuance of Treasury coupon securities (Figure 1). Not all of the auction take-up is absorbed on dealer balance sheets, as dealers pre-sell a large part of their allocation to clients in the when-issued market between the auction and the issuance date. Nevertheless, dealers continue to play a crucial role in auctions by placing bids on their own account as well as that of their customers. Dealers also provide repo financing for clients' Treasury positions, enabling their clients to take down a greater volume of issuance. Because of their central role, primary dealers' balance sheets are subject to large changes on Treasury issuance dates.

Response of dealer balance sheets to Treasury issuance

To understand the effects of Treasury auctions on dealers' balance sheets, we analyze how their Treasury positions and repo volumes change on days when Treasury securities are issued. On issuance dates, primary dealer balance sheets are likely to increase because of settlements of the securities awarded to primary dealers (unless they were presold between the auction and the settlement), and because of increased demand for financing of these securities and those purchased by clients.

Using data from Complex Institution Liquidity Monitoring Reports (FR 2052a), we measure the daily Treasury positions, dealer repo, and reverse repo (financing provided to clients) of the eight largest GSIB-affiliated dealers. We measure Treasury issuance using public auction data from Treasury Direct. We estimate a regression of daily changes in positions and financing on the daily amount of Treasury issuance, separating coupon securities from bills. We also control for quarter-ends using a dummy variable, since Treasury repo volumes often decrease on quarter-end dates due to window dressing. Finally, we control for the amount purchased under the Treasury's buyback program, in which it purchases coupon securities from primary dealers to achieve cash management goals or support market liquidity.²

As shown in Table 1, for every dollar of Treasury coupon securities issued, dealers' balance sheets increase by about 21 cents in total-positions increase by 8 cents and repo and reverse repo each increase by 13 cents. Dealers' positions and repo also increase in response to bill issuance, although the magnitude of the effect is smaller, as bills are typically distributed to clients quickly and do not tend to be financed in repo.³ Treasury buybacks cause a sharp decrease in dealers' positions, while their repo activity is not significantly affected.⁴ The results also show drops in dealers' balance sheets on quarter-ends, particularly for repo activity, consistent with window dressing activity or certain regulatory constraints.⁵

Table 1. Dealer Balance Sheet Sensitivity to Treasury Issuance

We also examine how dealers' sensitivity to Treasury issuance differed during the two recent periods of quantitative tightening (QT). During QT periods, demand for dealer Treasury intermediation and financing is likely to be bigger as clients end up holding more of the newly issued securities. In these regressions, we include two dummy variables for the QT1 period from October 2017 to July 2019 and for the QT2 period from June 2022 to the end of our sample in June 2025. We also interact these QT dummies with our Treasury issuance variables. The results, shown in Table 2, suggest that the effect of issuance on dealer balance sheets is often stronger during QT periods. In particular, dealers' positions increased by 3.3 cents more for each dollar of coupon issuance during QT1 than during non-QT periods. And dealers' repo and reverse repo each increased about 13 cents more for each dollar of coupon issuance during QT2 than during non-QT periods.⁶ The sensitivity of dealers' repo and reverse repo to bill issuance also appears to increase during QT periods, though by less than for coupons, as bills are less likely to be financed in repo.⁷

Table 2. Dealer Balance Sheet Sensitivity to Treasury Issuance, with QT Periods

This table shows estimated coefficients from regressions of daily changes in primary dealers' positions and financing on the daily amount of Treasury issuance, separately for Treasury coupon securities and Treasury bills. The sample is 1/1/2016 to 6/30/2025, and we include two dummy variables for the QT1 period from October 2017 to July 2019 and for the QT2 period from June 2022 to the end of our sample in June 2025. ***, **, *, denote significance at the 1%, 5%, and 10% levels respectively. Standard errors are shown in parentheses.

To better illustrate how dealers' sensitivity to issuance has varied over time, we calculate our baseline regression on a one-year rolling window. The coefficients for dealers' sensitivity to coupon issuance are plotted in Figure 2. This exercise confirms that dealers' balance sheets are more sensitive to issuance during periods of QT and shows that their repo volumes have been particularly sensitive during the QT2 period. This recent heightened sensitivity of repo is likely due to the increased takedown of issuance by investment funds, who borrow from dealers through repo to finance these securities. In particular, this period coincides with a pickup in relative value trading by hedge funds, which requires high amounts of leverage sourced through Treasury repo.

How persistent is the effect on dealer balance sheets?

We construct comprehensive measures of primary dealer flows for Treasury securities around auction and issuance dates using a combination of data from Government Securities Dealer Reports (FR 2004) and regulatory Treasury TRACE. The FR 2004-WI schedule provides information on when-issued transactions-forward transactions prior to issuance-engaged in by primary dealers, as well as their auction take-down and forward financing agreements, while TRACE provides comprehensive data for all secondary market Treasury transactions. Leveraging these two data sets together allows us to construct CUSIP-level measures of dealer net positioning around auction and issue dates.⁸

Figure 3 shows dealer-level mean activity in all issued CUSIPs from March 2016 to July 2025. The chart on the left (Panel A) is presented in event-time relative to the auction date, and the right chart (Panel B) provides a similar picture relative to the issuance date. The two charts demonstrate that primary dealers engage in substantial short selling across the maturity spectrum prior to receiving their allocation from the auction on day zero. By the issuance day, dealers pre-sell most of the auction take-up, so their net position on the issuance date is only a fraction of their auction allocation. Once their allocation is available, they continue to sell through their holdings, with a notably longer half-life (indicating greater retention) for the thirty-year tenor and shorter half-life for the ten- and twenty-year tenors, shown in Figure 4.⁹ Overall, these estimates suggest that dealers sell off almost all of the auction inventory within 3 to 5 days following the auction.¹⁰

Additional analysis using the FR 2052a data confirms that the effect of coupon issuance on dealers' long positions dissipates within roughly 3 days following issuance. However, the increase in their reverse repo on issuance dates is more persistent and still measurable during the week following the issuance, suggesting that dealers continue to finance newly issued securities for their clients. As shown in the previous section, dealers' reverse repo increases by more than their positions in response to issuance. Thus, much of the increase in dealers' balance sheets lasts beyond the days immediately following issuance.

How Treasury issuance affects dealer intermediation capacity

We examine whether an increase in Treasury issuance can lead to an increase in dealer balance-sheet constraints. Broadly speaking, two types of balance sheet constraints are most relevant for dealers' Treasury intermediation: (1) regulatory constraints, in particular the SLR, and (2) internal constraints on risk-taking, such as value at risk (VaR) limits at Treasury trading desks.

The SLR is relevant for Treasury market intermediation as it has the potential to impose a high regulatory capital requirement for a relatively low-risk but high-volume activity. However, both Treasury and repo exposures enter the SLR denominator as the daily average over the entire quarter, and short-term fluctuations in dealer exposures around Treasury issuance dates are unlikely to have a meaningful impact on the quarterly average. Taking the average effect on primary dealer balance sheets of 21 cents for every dollar of Treasury coupon securities issued as a baseline, a quarterly auction volume of Treasury coupon securities of $1 trillion would in the aggregate increase dealer balance sheets by about $210 billion.¹¹ Assuming the effect on dealer balance sheets takes 5 days following the auctions to unwind, the average effect over the quarter on dealer SLR exposure is about $17.5 billion. Assuming a 10-day duration of the balance sheet impact, in view of the greater persistence of repo financing, the average quarterly effect on the SLR denominator is about $35 billion. Even so, the increase in exposure appears small compared to the total headroom of primary dealers under the SLR, which exceeds $5 trillion.

Besides the immediate effects of Treasury issuance discussed in this note, the increase in the amount of Treasury securities outstanding is likely to have a longer-lasting effect on dealer balance sheets due to the increase in demands for dealer intermediation when there are more outstanding Treasury securities. These effects are discussed by Cochran et al. (2024) who find that under normal market conditions, the regulatory minimum SLR requirement would not be a binding constraint for dealer Treasury intermediation.

Analysis of VaR-based constraints
Dealer intermediation around issuance dates could also be constrained by internal risk limits, imposed by management at the trading desk level. The most widely used limit by Treasury trading desks is the maximum Value at Risk (VaR), which specifies the maximum level of trading portfolio risk a desk could carry, in terms of a model-calibrated potential loss in a tail event. Unlike the SLR which does not take risk into account, VaR is risk sensitive. As market conditions change, portfolio risks also change, pushing desks closer to or away from their VaR limits. Figure 6 shows the mean VaR usage, that is, the ratio of portfolio VaR to the VaR limit, across a sample of Treasury market-making desks at large GSIBs. Over the sample period, mean VaR usage was on average 35 percent, indicating that desks used about one-third of their headroom under their internal risk limits.

We examine the historical relationship between Treasury bills and coupon issuance, Treasury coupon buybacks, and VaR usage. In particular, we regress levels of mean VaR usage for UST market-making desks at time t and (t+1) on the volume of Treasury bills and coupon issuance based on auction dates at time t and Treasury coupon buybacks at time t. In addition, we control for interest rate volatility (MOVE) and dealers' Treasury long positions. The regression is at a daily frequency with a sample period of January 2016 to June 2025.

Regression results are shown in Table 3. The results show that a $100 billion increase in Treasury issuance implies an increase in mean VaR usage of 2.5 percentage points (about one-third of a standard deviation) on the same day (column 1) and an increase in mean VaR usage of 2.2 percentage points the following day (column 4), suggesting an increase in dealers' risk limit constraints. The coefficients are statistically significant at the 1 percent level, with robust standard errors, after controlling for MOVE.

Table 3. Effect of Treasury Issuance on VaR Usage

Column 2 shows that Treasury coupon buybacks reduce dealer balance sheet constraints with respect to VaR usage. A $1 billion increase in Treasury buybacks implies a decrease of 0.5 percentage points on the same day and a decrease of 0.4 percentage points the following day (column 5). These magnitudes control for MOVE and are in addition to effects of Treasury issuance.

In column 3, we add in long (settled) positions as a control.¹² Not surprisingly, the magnitude of the effect of Treasury issuance decreases somewhat after adding in Treasury positions, since the two are strongly related. However, the coefficient remains statistically significant at the 1 percent level, implying a 1.2 percentage point increase in mean VaR usage for every $100 billion increase in Treasury issuance (column 3). Adding in long positions also notably increases the magnitude of the effect of Treasury buybacks - every $1 billion increase in buybacks implies a 1.3 percentage point decrease in VaR usage.

Though not shown, the results are similar and robust when we use issuance dates for Treasury bills and coupons issuance instead of auction dates.

Overall, these results show a significant effect of Treasury issuance on VaR usage, a risk-based constraint that dealers face at the trading-desk level that can limit their intermediation capacity in the Treasury market.¹³

Implications for increased Treasury issuance

We find that dealer balance sheets expand around Treasury issuance, as demand for dealer market-making and repo intermediation rises. Although the immediate increases in dealer positions are typically quite short-lived, persisting for about 3-5 days on average, they have a measurable impact on dealers' risk-based constraints, as measured by VaR. These constraints become more binding during periods of elevated market volatility. Moreover, the effects of Treasury issuance on demand for financing appear more persistent, leading to a more sustained increase in dealer balance sheets. Overall, our findings suggest that upcoming increases in Treasury issuance will contribute to increased pressures on dealer balance sheets, which warrant monitoring.

References

Cochran, Paul and Petrasek, Lubomir and Saravay, Zack and Tian, Mary and Wu, Edward, "Assessment of Dealer Capacity to Intermediate in Treasury and Agency MBS Markets", FEDS Notes October 22, 2024.

Li, Dan and Petrasek, Lubomir and Tian, Mary H., Risk-averse Dealers in a Risk-free Market - The Role of Internal Risk Limits (March 1, 2024). Available at SSRN: https://ssrn.com/abstract=4824250 or http://dx.doi.org/10.2139/ssrn.4824250