Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee

May 5, 2026

Letter to the Secretary

Dear Mr. Secretary,

For much of the period since the TBAC last met in early February, financial markets have been highly influenced by oil prices, which are up nearly 60% since the start off the Iran conflict, and nearly 80% since the start of 2026. With other commodity prices also rising, the broad commodity index is now above the pandemic-period high, set in 2022. The impact of the surge in commodities has been felt most acutely in global rates markets. Rates market sentiment heading into the conflict was that central bank policy rates would be unchanged or lower by end-2026. The increase in inflation expectations since the start of the war has now forced a significant hawkish repricing of central bank policy, most notably in Europe. At the time of print, 10-year bond yields in many G10 countries were at or above the highs of the past few years. 1-year inflation swaps have jumped by an average of 100bps in Europe and 75bps in the US. Apart from the US, every other G10 central bank is now priced for rate hikes this year.

Another notable trend in these past few months is the outperformance of US markets. In 2026 to date, as in 2025, the UST market is the best performing G10 index. 10y UST yields remain well below the cycle highs and have risen only modestly since the last TBAC meeting. US equities have outperformed the rest of the world by nearly 10% since the start of March and have now reversed much of the underperformance witnessed at the start of 2026. Technology equities have led the way. The US economy remains the epicenter of the global technology investment cycle. Markets clearly believe that the US economy is likely to weather the impact of the Iran war better than other countries. Meanwhile, unlike Asia and Europe, the Iran conflict is a positive terms-of-trade shock for the US given its vast energy resources. Notably, US exports of energy products soared to record highs in the past two months. The US dollar has been more stable, as markets weigh near-term conflict positives against a potential further erosion of dollar demand in the long-term.

Uncertainty surrounding the US and global economic outlook has increased significantly due to the rise in energy prices, as noted by the primary dealers in their feedback as well. Data for the month of March showed a surge in US consumer spending on gasoline due to the rise in prices, but spending for other categories remained robust. Increased tax refunds from changes in fiscal policy have helped offset increased spending on gasoline.

Q1 real GDP advanced 2.0% QoQ annualized, rebounding from just 0.5% QoQ in Q4 that was weighed on by the government shutdown. Consumer spending remains a consistent support to growth but has slowed somewhat. Investment related to artificial intelligence has become a major contributor to growth. Business investment in other categories and residential investment has been soft, but shows recent signs of improvement.

The labor market has continued to exhibit a fragile equilibrium where low hiring is balanced by slow growth of labor supply. Monthly changes in measured payrolls have been more volatile than usual in 2026, with a large 133k decline in nonfarm payroll employment in February followed by a 178k increase in March. The unemployment rate has moved sideways in a 4.3-4.5% range over the last several months. Stable unemployment has coincided with a large decline in labor force participation, which partly reflects annual updates made to population and demographic estimates at the start of the year.

Headline inflation increased due to the rise in energy prices with PCE at 3.5% YoY in March. Core measures of inflation remain somewhat elevated above the two-percent target. A substantial wedge has opened between core PCE at 3.2% YoY and core CPI at 2.6% YoY. Federal Reserve officials and markets are now focused on the extent to which higher energy prices pass through into core inflation, a process that typically takes months to develop. Core goods inflation has been elevated over the last year in part due to pass-through from tariffs, but markets and central bankers had expected those effects to fade over the course of this year. While short-term market and survey-based inflation expectations have moved higher, longer-term expectations (e.g. five-year-forward inflation swaps) have been remarkably stable.

Against this backdrop, the Committee convened for the 3Q FY26 quarterly refunding. The outlook for the remainder of FY26 suggests Treasury remains adequately funded, though the funding gap begins to grow in FY27. In accordance with Treasury's cash management policy, the Treasury General Account (TGA) is expected to finish Q3 and Q4 FY26 higher, at $900bln and $950bln respectively. Generally, primary dealers expected no coupon increases in FY26 and anticipated changes to Treasury's forward guidance language a few quarters in advance of any increases.

The Committee appreciated an update on regulatory developments, such as changes to the enhanced supplementary leverage ratio, and their effects on the Treasury market. The Committee acknowledged the primary dealer feedback that while the developments were directionally positive, incremental benefits from here are expected to be modest. The Committee would welcome the opportunity to provide further input on the Treasury market implications of potential regulatory changes as useful to Treasury.

The Committee then moved to discuss the first of its two charges: central clearing implementation. The presenting member found that while much progress has been made, there are still two main open items: inter-affiliate Treasury transactions and extraterritorial reach on non-US transactions (between two non-US participants).

The SEC has been engaged with the industry on these issues and is actively facilitating closure. A timely resolution of these issues will allow the market to focus on remaining implementation issues, facilitating broad access prior to the deadlines.

The Committee then moved to discuss the second charge: Treasury investment in repo. By virtue of its cash management policy, Treasury holds a level of cash generally sufficient to cover one week of outflows in the TGA. Volatility in Treasury's cash needs generates intramonth excess in the TGA, and the Committee welcomed the opportunity to explore the potential benefits of investing that excess liquidity in the overnight repo market.

The Committee discussed different interpretations of and approaches to investing "excess" cash. One definition could be cash greater than the 1-week ahead need, while Treasury also could define "excess" as cash above a shorter time horizon, provided that Treasury is comfortable that maturing repo investments can be used to satisfy outflows. The presenting member explored using a cash need for 3d and using repo to cover days 4 and 5 for purposes of analysis.

While the definition of excess cash would govern how much cash is available to invest, design choices will influence how much volatility resides in the TGA and the repo investments. There was a healthy debate among the group as to what would be best for the market functioning in aggregate, in terms of where this volatility resides. Program design was viewed as being essential to answering these questions; for example, items like execution format, counterparty selection and documentation, operating timing and frequency, and capital implications for counterparties all could impact efficacy of any program and warrant further study. It was noted that debt limit constraints could complicate a Treasury program, irrespective of design.

The presenting member found there was scope for Treasury to invest excess cash in repo markets to the extent that positive net returns can be generated without creating market disruption. However, ultimately the return generated for Treasury was not expected to be positive in all environments, and was likely to be only modestly positive when positive at all. The presenting member found that lending out excess cash would be likely to have a small positive return (0-2bps) in an ample reserve regime, a 5-10bp return in a scarce reserve regime, and likely no positive economic value in an abundant reserve regime.

The presenting member highlighted an important accounting consideration due to the Federal Reserve's deferred asset position. As the Federal Reserve cannot pass on interest income to Treasury until (as estimated by the presenting member) 2030, but Treasury earns interest income upfront from the repo investment, there could be positive NPV even if repo rates are below Interest on Reserve Balances (IORB). The Committee felt it appropriate for Treasury to focus only on economic value.

Ultimately, while the Committee felt that there would likely be a marginal benefit to Treasury to engage in overnight repo trading with excess cash from the TGA, the scale of the economic benefit was not overly compelling relative to the perceived challenges of roll out. That said, further study, especially of possible program design, could help to inform a more refined recommendation, including a gradual and measured roll out, should there be one.

With respect to issuance recommendations, the Committee recommended keeping nominal coupon, FRN, and TIPS auctions sizes unchanged. As always, the Committee felt strong communication to ensure a regular and predictable operating framework would help to facilitate any adjustment period for market participants. The Committee continues to believe that current projections could warrant increases in coupon issuance in FY27.

As I conclude my term of service with TBAC, I would like to take the opportunity to thank you and your team, my fellow Committee members (past and present), and the very talented people I have had the great honor of collaborating with. Over the past eight years, I have been truly humbled by the dedication, enthusiasm and diligence with which these groups do their utmost to deliver for the American people. I am grateful and honored to have been a part of this important work, and I know I leave it in very good hands, with all of my fellow Committee members, and with Jason Granet at the helm. Thank you.

Respectfully,

Deirdre K Dunn

Chair, Treasury Borrowing Advisory Committee

Jason S Granet

Vice Chair, Treasury Borrowing Advisory Committee