The Treasury Borrowing Advisory Committee (TBAC) has released its latest report to the Secretary of the Treasury, providing an overview of recent developments in financial markets, economic trends, and recommendations for Treasury debt issuance.
Since the committee’s last meeting in November, U.S. Treasury yields have remained mostly stable despite a notable increase in Japanese government bond yields that affected global fixed-income markets. U.S. equity prices have continued to rise, with the S&P 500 gaining 16% over the past year. Credit spreads remain tight and measures of market volatility are near multi-year lows.
Currency and commodity markets have experienced increased volatility. The U.S. dollar weakened sharply against major currencies in late January before partially rebounding. Gold and silver prices rose significantly during this period but declined as the dollar strengthened again. Copper prices climbed 21% over the last three months, while oil saw modest gains attributed partly to geopolitical tensions.
Economic data releases were delayed and sometimes distorted due to a government shutdown in October and November 2025. For example, the Bureau of Labor Statistics was unable to produce an October CPI inflation report, leading to temporary underestimates of inflation that are expected to correct by April.
In response to upward pressure on short-term interest rates in late 2025, the Federal Reserve ended balance sheet reduction on December 1 and began purchasing $40 billion per month in Treasury bills through Reserve Management Purchases starting December 12. These actions are intended to maintain ample reserves without significantly affecting longer-term yields.
In early January, President Trump announced plans aimed at reducing mortgage rates for new homebuyers by directing Fannie Mae and Freddie Mac to purchase $200 billion of mortgage-backed securities. This move is seen as signaling possible increased government intervention in keeping borrowing costs low.
The Federal Open Market Committee delivered three consecutive 25 basis point rate cuts at the end of 2025 but left rates unchanged in January 2026. Chair Powell indicated openness to further cuts if inflation slows or labor markets weaken further. Financial markets expect less than half a percentage point of additional cuts this year and showed little reaction after President Trump nominated Kevin Warsh as Fed Chair following Powell’s term expiration in May.
Economic growth was strong throughout 2025, with consumer spending supported by tax refunds from last year’s One Big Beautiful Bill Act and business investment driven by capital expenditures on electronics linked to artificial intelligence initiatives. However, housing remains weak due to high prices and mortgage rates; single-family housing starts have fallen recently.
Job growth has slowed more than other economic indicators, averaging just 29,000 new private nonfarm payrolls per month during the final quarter of 2025. The unemployment rate has held steady at around 4.4%, which some attribute to slower labor force growth from reduced immigration flows.
Inflation remains above target with core PCE at 2.8% year-over-year as of November; goods price inflation is elevated due partly to tariffs while services inflation has moderated thanks to cooling shelter costs. Commodity price increases present additional risks for inflation going forward.
Investor focus remains on supply-demand dynamics for U.S. Treasury securities amid attention on tariff revenues and potential Supreme Court decisions affecting future revenue streams related to international trade laws such as IEEPA tariffs. Demand at Treasury auctions continues strong with bid-to-cover ratios within normal ranges.
The TBAC expressed support for exploring issuance of Secured Overnight Financing Rate (SOFR) Floating Rate Notes (FRNs), echoing feedback from primary dealers who largely favor such instruments for their utility among money market funds (MMFs) and other investors managing short-term assets.
The committee also discussed how Federal Reserve holdings via its System Open Market Account affect overall Treasury debt composition when making issuance decisions—particularly during periods when Fed policy shifts lead to significant changes in private sector holdings versus central bank balances.
Trends indicate that since 2022 there has been a shift from Federal Reserve holdings toward more price-sensitive investors including MMFs, exchange-traded funds, banks, broker-dealers, and foreign private sector entities—the latter now accounting for nearly all recent growth in foreign demand for Treasuries.
Demographic changes may support future demand as household wealth becomes more concentrated among older age groups who tend toward higher fixed-income allocations; additionally, stablecoins could contribute incrementally to short-end Treasury demand.
The committee observed that while Treasuries continue serving as portfolio diversification tools, their value fluctuates more today—sometimes correlating positively with equities during periods of high inflation—which could impact demand from certain investor segments.
For now, TBAC recommends leaving nominal coupon auction sizes unchanged but acknowledges that projected funding needs may require increases beginning fiscal year 2027; it stressed clear communication around any future adjustments will be important for market stability.
"Respectfully,
Deirdre K Dunn
Chair, Treasury Borrowing Advisory Committee
Jason S Granet
Vice Chair, Treasury Borrowing Advisory Committee"
