April 29, 2025
Recent developments in U.S. government policy, notably higher-than-expected tariff rates, have significantly impacted global asset markets, according to the Treasury Borrowing Advisory Committee (TBAC). In a letter to the Secretary of the Treasury, the committee highlighted these changes' influence on market volatility and investor responses.
Since February, key financial indicators have fluctuated, with Treasury yields and the S&P 500 experiencing varied movements. Specifically, "2y Tsy yld" ranged from a high of 4.35% to a low of 3.65%, with a "current" yield of 3.69% as of April 28. The "10y Tsy yld" reached a high of 4.62% and a low of 3.99%, currently standing at 4.21%. Meanwhile, the S&P 500 showed significant range within the said timeframe, highlighting a volatile market environment.
The Treasury Borrowing Advisory Committee expressed concerns about the global economic outlook, emphasizing the uncertainty caused by international trade negotiations. Economic forecasts have been adjusted, with growth predictions for 2025 real GDP decreasing from 2.2% to 1.4%, and unemployment projections rising from 4.3% to 4.6% in Q4 2025.
Inflation remains a critical concern, with "Inflation remains elevated with core PCE at 2.8% YoY in February," although softer PPI and CPI could indicate a slowing trend. Surveys like the University of Michigan's show increased consumer inflation expectations, in contrast to the Federal Reserve Bank of New York's more moderate predictions.
The Federal Open Market Committee has paused rate cuts, signaling a continuation of this stance at least through May. The market is currently pricing in about 90 basis points of rate cuts this year, suggesting scenarios where the Federal Reserve might implement deeper cuts should the labor market worsen.
The market perception of U.S. Treasuries as a safe haven has been questioned due to simultaneous declines in valuations for U.S. equities, Treasuries, and the U.S. dollar. This is exacerbated by factors such as economic uncertainty, fears of long-term investor selling, and market volatility.
Treasury's buyback program continues to receive positive market reception, aimed at supporting liquidity and cash management. The committee reviewed the Treasury's May 2025 Quarterly Refunding Presentation, with projected privately-held net marketable borrowing for Q3 FY 2025 and Q4 FY 2025 stated at $514 billion and $554 billion, respectively.
On the debt limit, the committee reiterated that it does little to constrain spending, emphasizing its negative effects like increased volatility and potential technical default. The committee suggested options to improve the debt limit process, leaning towards its elimination to mitigate risks and resource wastage.
The growing market cap of stablecoins, around $234 billion, with expectations of reaching about $2 trillion by 2028, was also discussed. The potential for stablecoins to impact U.S. Treasury demand and credit creation was noted, along with regulatory considerations for interest-bearing variants.
Regarding issuance, the committee recommended maintaining current nominal coupon sizes, with an increase for the 5-year and 10-year TIPS. The committee stressed that any changes in language around issuance should not imply imminent changes to auction sizes.
As a final concern, the committee warned that unresolved debt limit constraints could hinder government funding and impact U.S. credit ratings, urging resolution to avoid undermining the U.S. Treasury market's foundation.
Respectfully,
Deirdre K. Dunn
Chair, Treasury Borrowing Advisory Committee
Mohit Mittal
Vice Chair, Treasury Borrowing Advisory Committee
