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

November 4, 2025

Letter to the Secretary

Dear Mr. Secretary,

Since the TBAC last met in late July, financial markets have exhibited low volatility, reflecting diminished uncertainty, resilient activity in both the US and global economy, and, more recently, a lack of market-moving US economic data due to the ongoing government shutdown. Equity prices continued to advance over the last three months, with the S&P 500 up 16.3% this year. Treasury yields moved lower as the Fed resumed rate cuts in September, with ten-year Treasury yields falling about 40 basis points to 4.0% and two-year Treasury yields declining to around 3.5%. After depreciating earlier this year, the broad trade-weighted US Dollar has been stable over the last three months.

Measures of implied asset price volatility remain low, reflecting market expectations that low realized volatility will continue. Three-month expiry options on ten-year interest rate swaps now imply 72 basis points (bp) of annualized volatility, the lowest level since 2021 and down substantially from a recent high of 120bp on April 8^th. Similarly, the VIX index of equity price volatility, which had spiked to its highest level in five years in April, has remained at benign levels since July.

The ongoing government shutdown may be contributing to the lack of volatility in financial markets, as key US economic data have been delayed. Additionally, the quality may be affected as data collection has been limited by the shutdown. Once the government reopens and delayed data is released, we may see investors and policymakers rapidly update their outlook for the US economy.

The delay, or in some cases absence, of data is raising focus on the calculation methodology for TIPS and CPI Inflation swaps, in the absence of CPI. Treasury's approach for CPI-related index contingencies is clearly stated in the Uniform Offering Circular. The Committee highlighted industry focus on the potential implications for the inflation swaps market if multiple CPI prints are missed, which could affect both demand for and secondary market liquidity in TIPS.

Data suggest that prior to the government shutdown, economic growth was resilient but slowing. Real GDP grew 1.6% annualized in the first half of 2025, down from 2.6% in the second half of 2024. Similarly, real final private domestic demand (which removes large swings in inventories and imports) slowed from 3.1% to 2.4%. Consumer spending has remained solid. Business investment has been supported by capital spending on electronics, consistent with corporate commitments to grow investments related to artificial intelligence. The housing sector remains weak as a consequence of elevated prices and mortgage rates, with single-family housing starts and permits falling in recent months.

The pace of job growth has slowed more significantly than other measures of economic activity. In the most recently available three months of data (June through August), additions to nonfarm payrolls averaged just 29k per month. The unemployment rate has remained relatively stable at 4.3%, suggesting that the "breakeven" pace of job growth required to keep the unemployment rate from rising has declined substantially due to reduced immigration flows and slower labor force growth. Weekly state-level data on jobless claims have continued to be released during the shutdown. These jobless claims data have been stable, suggesting there has not been a sharp weakening in the labor market since the shutdown began.

Inflation remains elevated, with core PCE projected at 2.8% YoY in September. Goods price inflation has remained elevated in part as firms pass through tariff-related cost increases, though tariff pass-through has so far been more modest than many forecasters had expected. At the October FOMC meeting, Chair Powell suggested that without the effect of tariffs, core inflation might be running closer to target at 2.3% YoY. Shelter price inflation has slowed to pre-pandemic rates, with soft increases in house prices and rents over the last year, and is expected to remain benign. Some categories of non-shelter services have been stronger in recent months, which has concerned some Fed officials, while others remain unconcerned given signs of a loosening in labor markets.

At the September FOMC meeting, Fed officials concluded that downside risks to employment had increased, bringing risks to the dual mandate into better balance. This suggests returning policy rates toward neutral, leading the committee to cut policy rates 25bp in both September and October. In September, the Fed's Summary of Economic Projections (SEP) showed a median "dot" implying 75bp of rate cuts in 2025. But there are significant differences across the FOMC regarding both the balance of risks to the dual mandate and the level of the neutral policy rate. Chair Powell emphasized that a rate cut in December is "not a foregone conclusion" and further rate cuts will depend on data.

The balance between supply and demand for US Treasuries remains a key focus for investors both domestically and abroad. Deficits are projected to be $1.940tn in FY2026 and $2.052tn in FY2027 in the latest dealer survey, $106bn lower in aggregate compared to last quarter's estimates. The level of tariff revenue has become an important input into deficit projections, meaning markets are watching the outcome of trade negotiations as well as court decisions that could affect tariff implementation. Overall, demand at auctions remains robust, with bid-to-cover ratios in normal ranges.

In October, short-term interest rates showed signs of upward pressure. There was robust discussion among the Committee as to whether this was more of a supply/collateral story or a demand/reserves story - ultimately some of both. The Committee cited factors including the ramp up in T-bill issuance after the increase in the debt limit, Canadian bank year-end in October, negligible RRP balances, and money market fund WAM extension (transition from repo to T-bills) ahead of expected Fed cuts. There was discussion about whether reserve levels are moving from "abundant" to "ample." The Tri-party General Collateral Rate (TGCR), which averaged lower than interest on reserve balances (IORB) in September, increased to 13 basis points above IORB on October 28^th.

There was discussion about the continued growth in Treasury's cash balance, which hit $1tn in the last week of October. Treasury's policy remains maintaining funds in the Treasury General Account (TGA) that would be sufficient to at least meet their one-week-ahead cash need. At times, this can be meaningfully larger than Treasury's quarter-end cash balance assumptions when there is an intersection of dates during which Treasury securities mature, interest payments are made, and other turn-of-the-month payments (Medicare, etc.) are disbursed. The Committee felt that market participants may not appreciate the need for flexible TGA balances intra-quarter vis-a-vis stated quarter-end assumptions (currently $850b), as per policy, and suggested enhanced communication as an item for further consideration for Treasury.

Turning to the charge, the Committee welcomed the opportunity to refresh the Optimal Debt Model, which is just one of many tools which Treasury can use to inform its issuance decisions. Since 2019, there has been a significant increase in the expected level and volatility of debt service costs, attributed to growing deficits, increased debt, and expanded term premium. The Committee's Model shows Treasury's current issuance mix to be near the efficient frontier; Treasury's move toward a higher share of T-bills in recent years somewhat reduced expected costs but also increased volatility.

This tradeoff is highly sensitive to the baseline economic forecast. While the current mix seems appropriate in a "Productivity Boom" scenario, the other scenarios highlighted additional risks for Treasury. The Model suggests that a decrease in bill issuance, increase in belly issuance, and a decrease in bonds lowers volatility for a negligible cost increase in the adverse scenarios. The Committee had an extensive debate around the tradeoff between solving for the lowest debt service cost versus limiting funding volatility, and how Treasury should think about risk tolerance and mitigation. Ultimately, outstanding debt stock, confidence in the economic outlook, and the Model limitations cited throughout the charge should be weighed against the value of the Model output.

In terms of issuance, the Committee recommended keeping nominal coupon sizes as well as TIPS issuance unchanged. The Committee discussed potential changes to coupon issuance in the future, and the timing thereof. Given the uncertainty of potential financing needs, the Committee was mixed on how Treasury should approach adjustments to its current forward guidance. The Committee believes that current projections could warrant increases in coupon issuance in FY2027.

Respectfully,

Deirdre K. Dunn

Chair, Treasury Borrowing Advisory Committee

Mohit Mittal

Vice Chair, Treasury Borrowing Advisory Committee