TBAC, the Treasury Bond Advisory Committee, is an obscure body. Even those immersed in the fixed income markets may not pay it much attention. But four times a year this group of bond dealer representatives meets with Treasury officials to provide input into the government’s massive and growing debt issuance plans. It’s a kind of kabuki dance in which both sides send signals about their desires/intentions, but without committing anything. The commitments come only after auctions for specific securities, weekly for Treasury bills, monthly for short-term notes and quarterly for long-maturity instruments.

These days all eyes are on the Treasury market (though not on the TBAC). That’s because Treasury has a massive task to manage about $28 trillion of marketable public debt ($36 trillion overall). This is up from about $18 trillion at the beginning of 2020. And the amount is expected to continue to grow by $1.5 to $2 trillion in each of the next several years, whether or not the Trump administration is successful in its plan to cut Federal spending.

The obscure pre-market TBAC dance goes on with the Treasury and the dealer representatives commenting on expectations, but neither showing their cards. This will come only after specific new issue terms are announced, bids are received, and results are revealed. Treasury receives sealed bids then awards the security in a process that is (hopefully) designed to achieve the lowest cost while supporting the dealers’ desire to offload the securities purchased to final buyers.

Distributing Treasury debt is not a trivial exercise. Last year the Treasury issued about $2.5 trillion And this year it will issue about $2.1 trillion.  That’s nearly $10 billion for each day the securities markets are open!

In the Treasury bill market, where there is about $6.1 trillion of publicly held debt, the largest buyers recently have been government money market funds that collectively own about 40%. The growth of money market fund assets, up from $4.7 trillion at the beginning of 2020 to over $7 trillion recently, has been a great support to the Treasury bill market where issuance has expanded apace.

For longer-maturity Treasuries the largest buyer class is investment funds who buy nearly 75% of the issuances. Foreign buyers have reduced their purchases of longer-maturity Treasuries and moved into Bills, though this move, which pre-dates the recent market volatility, has been modest and has been noted for the last several years. It remains to be seen whether the tariff/trade wars accelerate this trend.

In the background of the dance there has been the matter of the budget deficit and how much more borrowing will be needed over the next several years. On this matter, the administration has been coy at best. The Trump administration and budget hawks in Congress have created a great deal of smoke around the “cost” of the Trump-supported tax cuts, the offsets from cutting Federal spending and raising tariff revenue, etc. and you could conclude that if “fraud, waste and abuse” are rooted out and the administration’s tax and spending policies are adopted the deficit will at least stop expanding at a rapid pace and the debt burden will lessen.

The truth, as known to TBAC members and the administration, is that it will continue to grow by $6.5 trillion (the administration’s inside baseball figure) to $7 trillion (the TBAC figure) through FY 2027. And Trump’s “One Beautiful Big Bill” contains an expansion of the debt ceiling by as much as $5 trillion to carry us forward for a bit. So, there is more debt on the way.

An increase of this magnitude could result in an increase in Treasury bills outstanding of $1.2 to $1.4 trillion. More supply means that the short-term markets will be dominated increasingly by Treasuries, which are likely to crowd commercial paper and Federal Agencies. For states and localities, who in the aggregate hold about 40% of their investment assets in Treasuries, this is not necessarily a bad result, because Treasuries are the most liquid and secure of investments.  (For context, between 2020 and now the Treasury bill supply more than doubled from $2.7 trillion to $6.1 trillion.)

On the way from here to there the TBAC and Treasury performances foresee no notable changes in the recent pattern of Treasury bill and Treasury note issuance. Last year the Treasury forecast net issuance of $1.09 trillion in the second half of its fiscal year ending September 30. (Actual issuance hewed closely to this forecast). This year the total is expected to be $1.07 trillion. Most issuance will be concentrated in Treasury bills and notes maturing in five years or under. Given the volume of volatility-inducing news recently, “business as usual” is most welcome by the markets.

Lost in all of this, or more likely behind the screen, is the matter of the “X date”—the date when Treasury will run out of cash and could default on its debt. It’s likely to occur sometime after August 15, although the Treasury has thus far not published it and investors are not yet engaging in the “guess the date” game by avoiding Bill maturities around a certain date. At this writing there are no notable kinks in the Treasury bill curve—but  stay tuned. If the timetable for One Beautiful Big Bill—and its attendant debt ceiling extension—falls back, expect that the market will give more serious consideration to the risks for disruption.

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A Pretty Good Year for Short Term Separate Accounts—So Far

The PFII short term model portfolio is invested in a manner that matches the investment policies of many public agencies. It consists of 60% Treasuries, 30% corporates and 10% cash and its duration ended April at 1.62.  For details, see the PFII Dashboard here.

When interest rates started to rise in mid-2022 the portfolio returns fell behind those of cash, sometimes by a large margin. Cash Was King. But in the past year, as rates stabilized then fell, the return on the 1–3-year model improved and as of April 30, its one-year return was 6.43%. In April, rates declined modestly with two-year Treasuries falling by 29 basis points and the portfolio’s return was .72%, an annualized rate of 9.12%.

While 30% of the portfolio is invested in credit instruments, this sector made only a modest incremental contribution to the one-year return. We estimate that for the year the corporate holdings returned 6.82% compared with 6.50% for the Treasury sector. Since the beginning of the year Treasury holdings have out-performed by a small margin (2.42% vs. 2.18% for corporate holdings) as corporate credit spreads widened modestly.

The returns compare favorably to those of local government investment pools and money funds.  The PFII Prime LGIP Index yield averaged  4.96% for the year ending May 2, and the Government LGIP Index averaged 4.78%.

For those managing separate accounts or considering the potential value and risk of a separate account, this model and its history provides a benchmark.