TBAC Charge

Given your borrowing forecasts for the next two fiscal years, please comment on how
Treasury should consider adjustments to coupon issuance sizes in the coming
quarters. When should Treasury consider making adjustments to nominal coupon
auction sizes, and how should these adjustments be allocated across the curve?

August 2021

1
Outline

1. Framework for Addressing TBAC Charge

2. Projection of Funding Needs

3. Coarse Auction Resizing Scenarios

4. Demand Assessment of Auction Points

5. Fine Tuning Auction Adjustment Scenarios

6. Additional Considerations

7. Conclusions and Recommendations

8. Appendix

2
1. Framework for Addressing TBAC Charge
Framework for Addressing TBAC Charge
• To address the questions of when and by how much Treasury should alter future coupon bond issuance a model has been
used to estimate how overfunded Treasury would be under the current auction schedule and an assumed path of fiscal
spending and SOMA management. This provides a baseline estimate of how much coupon issuance needs to be reduced.
• When analyzing auction adjustments, we considered the following:
– The goal of maintaining regular and predictable issuance patterns while ensuring sufficient liquidity at existing nodes
o While the issuance tables shown throughout the analysis are in annual terms, the underlying auction
adjustments were implemented in a monthly regular and predictable fashion (e.g., consistently reducing an
auction point by $1 billion each month, beginning in the first month of the year, reduces annual issuance by
$78 billion in the first year, and then $144 billion in future years)
– The goal to target T-bills within a long-term range of 15% to 20% of total debt outstanding
– The impact on overall profile of the outstanding debt (WAM, duration and belly share*)
o Given the TBAC Optimal Debt Model’s preference for increasing belly share, we track this statistic throughout
the analysis
– The relative cost of each issuance point and the expected overall cost of issuance
• We evaluated different issuance scenarios under consistent fiscal spending and SOMA management assumptions.
• The scenarios are intended to assist in the decision of when and how issuance should be reduced over the next several
years, and more broadly, the debt issuance strategy going forward.

Assumptions for Addressing TBAC Charge

• The following assumptions have been made in each of the scenarios:
– The Fed’s net new purchases of Treasuries are assumed to decline linearly by $6.7 billion per month between
January 2022 and December 2022, and reinvestment of maturing debt is continued over the projection horizon
– The fiscal spending requirements use the CBO budget projections (as of July 2021) with an adjustment of $1.5 trillion
for additional fiscal packages not included in that baseline
– Unless otherwise stated, SOMA holdings are included within the measures of the outstanding Treasury debt
o For the purposes of calculating duration and WAM, SOMA holdings are treated as FRNs with the same
maturities
– 2-year FRN issuance is held constant at current levels
– Treasury General Account (TGA) is held constant at current levels throughout the projection period
– T-bills are issued as needed to meet the overall funding requirements in each coupon auction scenario
* Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 4
2. Projection of Funding Needs
 Federal Borrowing Requirements are Expected to Remain Large in
Coming Years
• While Federal government borrowing needs are projected to decline as the economy recovers from the impact of the
global pandemic over the next few years, they nonetheless are expected to remain quite large in historical terms.

• We assume additional fiscal packages are likely to be passed this year, resulting in additional aggregate net federal
spending of $1.5 trillion through 2030 (over the next 9 years*). This would further add to Treasury’s financing
requirements in coming years.

Federal Government Net Borrowing Needs (Fiscal Year)

As of June 30, 2021
USD, Billions Percent of GDP

$2,500 Bn 10%
■ CBO Projection (July 2021) ■ CBO Projection (July 2021)
■ Additional Fiscal Spending* ■ Additional Fiscal Spending*
$2,000 Bn 8%
■ Projected Fed Purchases of Treasuries* ■ Projected Fed Purchases of Treasuries*

$1,500 Bn 6%

$1,000 Bn 4%

$500 Bn 2%

$0 Bn 0%

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Source: CBO and committee participant. * Based on committee participant's estimates. 6

3. Coarse Auction Resizing Scenarios
Scenario 1—Maintain Current Auction Schedule
Assumed Annual Issuance Schedule ($bn)
• This scenario holds coupon issuance constant based on the
most recent actual quarterly issuance cycle (May - July) totals. Calendar 2Y 3Y 5Y 7Y 10Y 20Y 30Y 5Y 10Y 30Y
Year TIPS TIPS TIPS
• Under this scenario, Treasury will be significantly overfunded, 2022 720 696 732 744 468 300 300 68 88 18
the T-bill share will drop well outside the target range and the 2023 720 696 732 744 468 300 300 68 88 18
WAM and WAD will both extend longer 2024 720 696 732 744 468 300 300 68 88 18
2025 720 696 732 744 468 300 300 68 88 18
– In this scenario T-bill share falls to approximately 2% in
2026 720 696 732 744 468 300 300 68 88 18
2026-2027, a clearly unacceptable outcome 2027 720 696 732 744 468 300 300 68 88 18
• TIPS share gradually declines as a percent of outstanding debt 2028 720 696 732 744 468 300 300 68 88 18
2029 720 696 732 744 468 300 300 68 88 18
2030 720 696 732 744 468 300 300 68 88 18
2031 720 696 732 744 468 300 300 68 88 18

Projected % of Total Outstanding Debt Projected WAD and WAM (years)

% Years
60% 8.0
7.5
50%
7.0
6.5
40% Target Range for Bills Bill Share
6.0
TIPS Share Belly Share*
30% FRN Share 5.5
5.0
20%
4.5
Duration
4.0
10% SOMA Adjusted Duration
3.5 WAM
0% 3.0

Source: Committee participant. * Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 8
 Scenario 2—Reduce Nominal Coupon Auction Sizes Pro-Rata
• This scenario is designed to serve as our initial baseline, incorporating
the goal of maintaining T-bill share within the target range Assumed Annual Issuance Schedule ($bn)
• Nominal coupon auctions are reduced by 35% over the next 12 months Calendar 5Y 10Y 30Y
2Y 3Y 5Y 7Y 10Y 20Y 30Y
to maintain T-bill share within the target range. Given current fiscal Year TIPS TIPS TIPS
projections, nominal coupons would need to gradually increase Current 720 696 732 744 468 300 300 68 88 18
beginning in 2025 to fund increasing deficits 2022 585 564 593 603 380 243 243 80 97 20
2023 468 456 480 480 308 200 200 92 109 22
• After these cuts, auction sizes will be largely in line with pre-COVID
2024 468 456 480 480 308 200 200 104 121 24
levels, with the exception of the 20-year which was re-introduced in
2025 489 471 495 504 318 204 204 116 133 26
May 2020 and accounts for nearly all of the aggregate increase in
2026 546 525 552 562 352 226 226 116 133 26
nominal coupons
2027 576 552 588 600 372 240 240 116 133 26
• TIPS issuance is gradually increased to approximately 8%-9% share 2028 618 594 624 636 401 256 256 116 133 26
over the scenario horizon 2029 669 645 678 690 434 280 280 116 133 26
• This scenario increases the WAM/duration profile over the projection 2030 705 681 714 726 458 294 294 116 133 26
horizon, although less so than in Scenario 1 2031 720 696 732 744 468 300 300 116 133 26

% Years
Projected % of Total Outstanding Debt Projected WAD and WAM (years)
60% 8.0
Duration
7.5 SOMA Adjusted Duration
50%
7.0 WAM
6.5
40%
Target Range for Bills Bill Share 6.0

30% TIPS Share Belly Share* 5.5

FRN Share 5.0
20%
4.5
4.0
10%
3.5

0% 3.0

Source: Committee participant. * Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 9
Scenario 2 ALT—Reduce Nominal Coupon Auction Sizes by a Smaller
Pro-Rata Amount
Assumed Annual Issuance Schedule ($bn)
• This alternative scenario allows T-bill share to drop outside Calendar 5Y 10Y 30Y
2Y 3Y 5Y 7Y 10Y 20Y 30Y
the target range in order to keep nominal coupon auctions Year TIPS TIPS TIPS
more stable over the horizon Current 720 696 732 744 468 300 300 68 88 18
2022 624 603 633 644 405 262 262 80 97 20
• Nominal coupon auctions are reduced by 25% over the next 2023 540 528 552 564 356 224 224 92 109 22
12 months and are then increased beginning in 2027 2024 540 528 552 564 356 224 224 104 121 24
2025 540 528 552 564 356 224 224 116 133 26
• Like Scenario 2, TIPS issuance is gradually increased to 2026 540 528 552 564 356 224 224 116 133 26
approximately 8%-9% share over the scenario horizon 2027 561 540 570 579 364 232 232 116 133 26
2028 597 576 606 615 388 249 249 116 133 26
• Relative to Scenario 2, this scenario has a lower T-bill share
2029 633 611 642 653 410 264 264 116 133 26
and a longer WAM/Duration in the early/middle years of the
2030 669 645 678 690 434 280 280 116 133 26
scenario horizon
2031 705 681 714 726 458 294 294 116 133 26

Projected % of Total Outstanding Debt Projected WAD and WAM (years)

% Years
60% 8.0
Duration
7.5 SOMA Adjusted Duration
50%
7.0 WAM
6.5
40%
Target Range for Bills Bill Share 6.0

30% TIPS Share Belly Share* 5.5

FRN Share 5.0
20%
4.5
4.0
10%
3.5

0% 3.0

Source: Committee participant. * Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 10
4. Demand Assessment of Auction Points
 Framework for Assessing Relative Demand Across Auction Points
• Within a regular and predictable framework, Treasury may reduce its funding cost by adjusting issuance at curve points
based on perceived relative demand.

– Relative value measures are one method to gauge relative demand among auction points.

– A key question is whether these relative demand indicators are transitory or persistent.

• The most liquid on-the-runs tend to trade at a greater liquidity premium and therefore Treasury can benefit by issuing a
greater proportion of these highly liquid securities.

• In this section different relative cost measures will be used to identify the most highly sought after and attractive points for
Treasury issuance.

– First, a model independent method of measuring relative cost is employed using swap spreads.

– Second, a committee participant term structure model is used to fit a fair value curve and relative cost is measured to
that fair value curve. This second approach produces results consistent with the swap spread analysis.

– A market repo analysis and a comparison of secondary trading volume with issuance are also presented to
complement these relative cost analyses.

– We focused our analysis on comparing 7s and 20s against butterflies of 5s, 10s and 30s.

• Finally, a committee participant term structure model is used to assess demand differences across auction points broadly.

12
Assessing Relative Demand Using Swap Spreads
• Swap spreads can provide a model independent method of identifying relative cost of specific auction points.

• Duration neutral butterflies of swap spreads indicate that:

– On-the-run 7s have generally been cheap vs. a butterfly of on-the-run 5s and on-the-run 10s.
– On-the-run 20s have generally been cheap vs. a butterfly of on-the-run 10s and on-the-run 30s.

7s vs. 5s/10s Butterfly Swap Spread 20s vs. 10s/30s Butterfly Swap Spread
Bps As of June 30, 2021 Bps As of June 30, 2021
20 20

15 15

10 10 Average:
2.9 bps

5 Average:
5
3.5 bps
0 0

-5 -5

-10 -10

-15 -15

Note: Re-introduced 7-year auctions in February 2009.

Re-introduced 20-year auctions in May 2020.
Swap spread is defined as on-the-run treasury yield minus corresponding LIBOR swap rate.

Source: Bloomberg and committee participant. 13

Assessing Relative Demand Using Fitted Treasury Yield Curve
• Committee participant fitted yield curve provides an estimate of the relative cost of specific auction points 1.

• The relative cost estimate of each on-the-run Treasury is shown below:

Average Spreads of On-the-Run Treasuries to Committee Participant Yield Curve Fit (Bps)
As of June 30, 2021

5s 7s 10s 20s 30s

Average Since 2/27/1998 -7.0 N/A -13.7 N/A -10.4
Average Since 2/26/2009 -5.2 -2.7 -7.2 N/A -1.7
Average Since 5/20/2020 -4.1 -2.0 -6.7 -2.3 -4.7

Bps 252 Day Rolling Spreads to Committee Participant Yield Curve Fit
10 of On-the-Run Treasuries
As of June 30, 2021
5
0
-5
-10
-15
-20
-25
-30
-35 5s 7s 10s 20s 30s

-40
-45

Note: Re-introduced 7-year auctions in February 2009.

Re-introduced 20-year auctions in May 2020.
Source: Committee participant model. 1 Presenting members model used for fitted Treasury yield is a proprietary stochastic term structure model which fits fair value for off the run 14
Treasury bonds and bond volatility.
Assessing Relative Demand Using Fitted Treasury Yield Curve
• Duration neutral butterflies of these fitted yield deviations support the findings from the swap spread butterfly analysis:

– On-the-run 7s have generally been cheap vs. a butterfly of on-the-run 5s and on-the-run 10s.

– On-the-run 20s have generally been cheap vs. a butterfly of on-the-run 10s and on-the-run 30s.

7s vs. 5s/10s Butterfly 20s vs. 10s/30s Butterfly

Bps As of June 30, 2021 Bps As of June 30, 2021
20 20
Butterfly Spread to Model Fitted Yield Butterfly Spread to Model Fitted Yield
Butterfly Swap Spread Butterfly Swap Spread
15 15

Average:
10 10
2.9 bps
3.3 bps
5 Average: 5
3.3 bps
0 3.5 bps 0

-5 -5

-10 -10

-15 -15

Note: Re-introduced 7-year auctions in February 2009.

Re-introduced 20-year auctions in May 2020.
Swap spread is defined as on-the-run treasury yield minus corresponding LIBOR swap rate.

Source: Bloomberg and committee participant. 15

Assessing Market Demand Using Repo Rate Analysis
• On-the-run Treasury specialness is defined as the difference in financing costs to repo on-the-run Treasuries and off-the-run
Treasuries.

• While explaining only a portion of the fitted yields, this provides additional support for the relative cost of on-the-run Treasuries.

Yield Value of the Cumulative Repo Richness of On-The-Run Treasuries* (Price Yield, Bps)
As of June 30, 2021
5s 7s 10s 20s 30s
Average Since 1/1/2010 (0.87) (0.34) (1.44) -- (0.43)
Average Since 5/20/2020 (0.45) (0.22) (1.23) (0.05) (0.30)

252 Day Rolling Average of Yield Value of the Cumulative Repo

Richness of On-The-Run Treasuries*
Yield, Bps As of June 30, 2021
-

(0.50)

(1.00)

(1.50)

(2.00)

(2.50)
5yr 7yr 10yr 20yr 30yr

(3.00)

Note: Re-introduced 20-year auctions in May 2020.

Source: Bloomberg, JPMorgan Markets. * Cumulative repo richness includes the repo richness of on-the-run until it becomes the 4th old. 16
Assessing Market Demand Using Trading Volumes Relative to
Auction Size
• Secondary Treasury trading volumes relative to issuance size are much higher in 5s and 10s than other nodes.
• Over the past 18 months, 54% of on-the-run Treasury trading volume has been in 5s and 10s, despite representing only 29% of
the issuance.
• These are the most liquid points on the Treasury curve and this is likely due to MBS and corporate bond hedging activity.
• 30-year trading volume is more than double 20-year trading volume despite equal issuance amounts. Furthermore, 30-year on-
the-run volume understates the liquidity demands at the 30-year point because 30-year corporates are priced/hedged using the
once old 30-year.
• Investors are willing to accept a lower yield for these more liquid securities.
• This suggests there is capacity for Treasury to consider issuing a greater proportion in 5s, 10s and 30s and benefit more from the
richness of these points.

Trading Volumes and Issuance Trading Volumes and Issuance

January 1, 2020 – June 30, 2021 May and June 2021
Treasury Treasury Trading $ / Treasury Treasury Trading $ /
Volume Issuance Issuance $* Volume Issuance Issuance $*
2s 13% 17% 16.63 2s 11% 17% 16.12
3s 12% 17% 16.89 3s 13% 17% 19.69
5s 29% 18% 36.83 5s 28% 18% 38.53
7s 10% 18% 13.24 7s 10% 18% 13.95
10s 26% 11% 52.10 10s 25% 11% 54.53
> 10Y 8% 15% 12.47 20s 3% 7% 11.65
TIPS 2% 4% 13.52 30s 7% 7% 23.09
TIPS 3% 4% 15.36

Notes on Data Provided:

• FINRA has provided trading volume statistics for 20-year on the runs since May 2021.
• Since this period is so short, we compare the trading volumes of the prior 18 months to show that May and June 2021 period is representative
of the longer period.
Source: FINRA and TRACE. *Annualized Treasury on-the-run trading volume divided by annualized issuance volume. 17
Assessing Relative Demand Across Broad Yield Curve Segments*
• Committee participant fitted Treasury and fitted Swap yield curves are compared to assess demand differences across
the yield curve broadly.
• Before the global financial crisis, Treasuries consistently traded at lower yields than Swaps across the entire yield curve.
– Swap spreads were generally flat across the term structure.
• Since then, Swap spreads have been significantly lower.
– The Treasury curve has been persistently steeper than the Swap curve.

Average Spread of Swap Curve to Treasury Curve (Bps)

As of June 30, 2021

2s 3s 5s 10s 30s
Average From 2/27/1998 to 12/31/2007 48 50 49 45 40
Average From 1/1/2009 to 6/30/2021 21 17 9 -5 -27

Bps
Spread of Swap Curve to Treasury Curve
As of June 30, 2021
200 200
180
150
160
100 140
120
50
100
0
80

-50 2s 3s 60
5s 10s 40
-100
30s 20
-150 0

Source: Committee participant model. * For a more in-depth discussion, see previous TBAC charge from February 2021. 18
5. Fine Tuning Auction Adjustment Scenarios
Scenario 3—Relative Market Demand Adjustments
Assumed Annual Issuance Schedule ($bn)
• Given the preceding relative market demand analysis, this
scenario further reduces the 7 and 20-year auctions relative to Calendar 2Y 3Y 5Y 7Y 10Y 20Y 30Y 5Y 10Y 30Y
Year TIPS TIPS TIPS
Scenario 2. For illustrative purposes, 7-year auctions are
Current 720 696 732 744 468 300 300 68 88 18
reduced by approximately $100bn and 20-year auctions are
2022 585 564 619 549 422 217 257 80 97 20
reduced by approximately $50bn, annually
2023 468 456 528 384 380 152 224 92 109 22
• Offsetting increases are made to the 5, 10 and 30-year 2024 468 456 528 384 380 152 224 104 121 24
auctions using a par weighted butterfly approach 2025 489 471 543 408 390 156 228 116 133 26
• We reduced the 20-year auction by a smaller amount to ensure 2026 546 525 600 466 424 178 250 116 133 26
sufficient liquidity at the 20-year point 2027 576 552 636 504 444 192 264 116 133 26
2028 618 594 672 540 473 208 280 116 133 26
• This method has little impact on WAM/duration profile, as well 2029 669 645 726 594 506 232 304 116 133 26
as belly share and T-bill share of the outstanding debt, relative 2030 705 681 762 630 530 246 318 116 133 26
to Scenario 2, while likely achieving a lower cost of issuance 2031 720 696 780 648 540 252 324 116 133 26

% Projected % of Total Outstanding Debt Years Projected WAD and WAM (years)
60% 8.0
Duration
7.5 SOMA Adjusted Duration
50%
7.0 WAM

6.5
40%
Target Range for Bills Bill Share 6.0

30% TIPS Share Belly Share* 5.5

FRN Share
5.0
20%
4.5
4.0
10%
3.5

0% 3.0

Source: Committee participant. * Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 20
Scenario 4—Increase the Belly Share
Assumed Annual Issuance Schedule ($bn)
• This scenario increases the belly share of the debt, as
favored by the TBAC Optimal Debt Model, while making an Calendar 2Y 3Y 5Y 7Y 10Y 20Y 30Y 5Y 10Y 30Y
Year TIPS TIPS TIPS
offsetting decrease of long end issuance
Current 720 696 732 744 468 300 300 68 88 18
• For illustrative purposes, in this scenario we modify Scenario 2022 599 578 634 562 396 205 242 80 97 20
3 to reallocate approximately $100bn of issuance from 10s, 2023 492 480 552 408 332 128 200 92 109 22
20s and 30s to 2s, 3s, 5s and 7s 2024 492 480 552 408 332 128 200 104 121 24
2025 513 495 567 432 342 132 204 116 133 26
• This scenario results in a decrease in the WAM/duration 2026 570 549 624 490 376 154 226 116 133 26
profile relative to Scenarios 2 and 3, while also potentially 2027 600 576 660 528 396 168 240 116 133 26
reducing term premia costs 2028 642 618 696 564 425 184 256 116 133 26
2029 693 669 750 618 458 208 280 116 133 26
2030 729 705 786 654 482 222 294 116 133 26
2031 744 720 804 672 492 228 300 116 133 26

Projected % of Total Outstanding Debt Projected WAD and WAM (years)

% Years
60% 8.0
Duration
7.5 SOMA Adjusted Duration
50%
7.0 WAM
6.5
40%
Target Range for Bills Bill Share 6.0
30% TIPS Share Belly Share* 5.5
FRN Share 5.0
20%
4.5
4.0
10%
3.5
0% 3.0

Source: Committee participant. * Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 21
Scenario 5—Decrease the Belly Share
Assumed Annual Issuance Schedule ($bn)
• This scenario decreases the belly share of the debt, to
reduce the uncertainty of interest costs in future budgets, Calendar 2Y 3Y 5Y 7Y 10Y 20Y 30Y 5Y 10Y 30Y
Year TIPS TIPS TIPS
while making an offsetting increase of long end issuance
Current 720 696 732 744 468 300 300 68 88 18
• For illustrative purposes, in this scenario we modify Scenario 2022 571 550 604 536 448 229 272 80 97 20
3 to reallocate approximately $100bn of issuance from 2s, 3s, 2023 444 432 504 360 428 176 248 92 109 22
5s and 7s to 10s, 20s and 30s 2024 444 432 504 360 428 176 248 104 121 24
2025 465 447 519 384 438 180 252 116 133 26
• This scenario results in an increase in the WAM/duration 2026 522 501 576 442 472 202 274 116 133 26
profile relative to Scenarios 2 and 3, although it potentially 2027 552 528 612 480 492 216 288 116 133 26
increases term premia costs 2028 594 570 648 516 521 232 304 116 133 26
2029 645 621 702 570 554 256 328 116 133 26
2030 681 657 738 606 578 270 342 116 133 26
2031 696 672 756 624 588 276 348 116 133 26

Projected % of Total Outstanding Debt Projected WAD and WAM (years)

% Years
60% Target Range for Bills Bill Share 8.0
Duration
TIPS Share Belly Share* 7.5 SOMA Adjusted Duration
50% FRN Share WAM
7.0
6.5
40%
6.0
30% 5.5
5.0
20%
4.5
4.0
10%
3.5
0% 3.0

Source: Committee participant. * Note: Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. 22
Summary of Scenarios
% T-Bill Share $, Trillions T-Bills Outstanding
25 8
Scenario 1 Scenario 2
7 Scenario 3 Scenario 4 Scenario 1
20
6
Scenario 5
▬
Flat issuance
15 5
Scenario 1 Scenario 2
Scenario 3 Scenario 4 4
10 Scenario 5 ▬ Target Range
for T-Bills
3
2
5 Scenario 2*
1
▬
0 0 35% Pro-rata cut
Jun-21 Jun-24 Jun-27 Jun-30 Jun-21 Jun-24 Jun-27 Jun-30
(with issuance gradually
Years WAM % Belly Share increasing starting in 2025)
8.0 55

7.5
50
7.0 Scenario 3
6.5 ▬
45 Scenario 2 +
6.0 RV adjustment
Scenario 1 Scenario 2 Scenario 3
5.5 40 Scenario 1 Scenario 2
Scenario 4 Scenario 5
Scenario 3 Scenario 4
5.0 Scenario 5
Jun-21 Jun-24 Jun-27 Jun-30 35
Jun-21 Jun-24 Jun-27 Jun-30
Scenario 4
Years Duration Years SOMA Adjusted Duration ▬
6.5 5.0 Scenario 3 +
Increased belly share

6.0 4.5

5.5 4.0
Scenario 5
5.0 3.5
▬
Scenario 1 Scenario 2
Scenario 3 Scenario 4
Scenario 1 Scenario 2 Scenario 3 +
Scenario 3 Scenario 4 Decreased belly share
Scenario 5 Scenario 5
4.5 3.0
Jun-21 Jun-24 Jun-27 Jun-30 Jun-21 Jun-24 Jun-27 Jun-30

As of June 30, 2021. Source: Committee participant. Belly share is defined as the % of outstanding debt with remaining maturity greater than 1 year and less than 8.5 years. * Where Scenario 23
2 is not visible, it is being hidden by the Scenario 3 line.
6. Additional Considerations
Other Considerations
• Treasury is faced with a number of significant uncertainties and must continue to maintain a flexible approach.

– Major fiscal policy initiatives can significantly alter the future path of fiscal deficits, creating uncertainty around
Treasury funding requirements; examples include fiscal packages currently under discussion as well as potential
extensions of household tax cuts when they expire at the end of 2025.

– Differences between actual and CBO's projected paths of real GDP can be expected to result in unanticipated
changes in Treasury's funding needs.

– In addition, given elevated levels of debt/GDP, interest rate volatility also introduces greater uncertainty looking
forward.

– Finally, the Federal Reserve's balance sheet policies over time add additional uncertainty to Treasury's future
funding needs.

• Treasury’s implementation of its regular and predictable philosophy should consider both uncertain funding requirements
and the need to maintain sufficient outstanding supply of T-bills.

25
7. Conclusions and Recommendations
Conclusions and Recommendations
• The current auction schedule would likely leave Treasury significantly overfunded.

• Issuance will need to be cut in coming years to maintain a reasonable share of T-bills.

• Choosing between Scenario 2 and Scenario 2-ALT is a trade-off between maintaining T-bill share within the target range
and keeping nominal coupon auctions more stable over time.

– Scenario 2 maintains more stability in the share of T-bills and adjusts coupons gradually over a one year time
frame. This approach recognizes the significant fiscal uncertainty Treasury faces and the historically large
current size of coupon auctions.

– The presenting member favors initially sizing coupon reductions consistent with Scenario 2-ALT, thereby leaving
flexibility for further reductions later if needed.

• The presenting member recommends a reduction in 7 and 20-year issuance, with offsetting adjustments to 5, 10 and 30-
year auctions as illustrated in Scenario 3. We recommend that Treasury make these adjustments gradually over time
while observing market feedback and adhering to regular and predictable principles.

• Choosing between Scenarios 4 and 5 is a trade-off between potentially increasing term premia costs and the uncertainty
of interest costs in future budgets.

– The TBAC optimal debt model favors increasing belly share and, therefore, would tend to favor Scenario 4.

– Given all the elements of uncertainty that Treasury faces, the presenting member favors the adjustments implied
in Scenario 5 to reduce the uncertainty of interest costs in future budgets.

• The scenarios presented are illustrative and meant to convey both a guiding framework and a general direction for
auction adjustments.

– We recommend that Treasury consider implementing near term auction changes with an eye on long term debt
dynamics (T-bill share, belly share, WAM, and duration).

– While more distant years are of course more uncertain, looking at these long-term projections can provide
insights into how debt characteristics may evolve over time.

• In practice, when implementing specific auction adjustments, Treasury should consider both changing fiscal dynamics
and market factors, while keeping changes gradual, well telegraphed, and in keeping with regular and predictable
principles. 27
8. Appendix
Summary—Change in Gross Issuance from Scenario 1 (in $bn)

Scenario 2 ($bn) Scenario 3 ($bn)

Calendar 5Y 10Y 30Y Calendar 5Y 10Y 30Y
2Y 3Y 5Y 7Y 10Y 20Y 30Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Year TIPS TIPS TIPS Year TIPS TIPS TIPS
2022 -135 -132 -139 -141 -88 -57 -57 12 9 2 2022 -135 -132 -113 -195 -46 -83 -43 12 9 2
2023 -252 -240 -252 -264 -160 -100 -100 24 21 4 2023 -252 -240 -204 -360 -88 -148 -76 24 21 4
2024 -252 -240 -252 -264 -160 -100 -100 36 33 6 2024 -252 -240 -204 -360 -88 -148 -76 36 33 6
2025 -231 -225 -237 -240 -150 -96 -96 48 45 8 2025 -231 -225 -189 -336 -78 -144 -72 48 45 8
2026 -174 -171 -180 -182 -116 -74 -74 48 45 8 2026 -174 -171 -132 -278 -44 -122 -50 48 45 8
2027 -144 -144 -144 -144 -96 -60 -60 48 45 8 2027 -144 -144 -96 -240 -24 -108 -36 48 45 8
2028 -102 -102 -108 -108 -67 -44 -44 48 45 8 2028 -102 -102 -60 -204 5 -92 -20 48 45 8
2029 -51 -51 -54 -54 -34 -20 -20 48 45 8 2029 -51 -51 -6 -150 38 -68 4 48 45 8
2030 -15 -15 -18 -18 -10 -6 -6 48 45 8 2030 -15 -15 30 -114 62 -54 18 48 45 8
2031 0 0 0 0 0 0 0 48 45 8 2031 0 0 48 -96 72 -48 24 48 45 8

Scenario 4 ($bn) Scenario 5 ($bn)

Calendar 5Y 10Y 30Y Calendar 5Y 10Y 30Y

2Y 3Y 5Y 7Y 10Y 20Y 30Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Year TIPS TIPS TIPS Year TIPS TIPS TIPS
2022 -121 -118 -98 -182 -72 -95 -58 12 9 2 2022 -149 -146 -128 -208 -20 -71 -28 12 9 2
2023 -228 -216 -180 -336 -136 -172 -100 24 21 4 2023 -276 -264 -228 -384 -40 -124 -52 24 21 4
2024 -228 -216 -180 -336 -136 -172 -100 36 33 6 2024 -276 -264 -228 -384 -40 -124 -52 36 33 6
2025 -207 -201 -165 -312 -126 -168 -96 48 45 8 2025 -255 -249 -213 -360 -30 -120 -48 48 45 8
2026 -150 -147 -108 -254 -92 -146 -74 48 45 8 2026 -198 -195 -156 -302 4 -98 -26 48 45 8
2027 -120 -120 -72 -216 -72 -132 -60 48 45 8 2027 -168 -168 -120 -264 24 -84 -12 48 45 8
2028 -78 -78 -36 -180 -43 -116 -44 48 45 8 2028 -126 -126 -84 -228 53 -68 4 48 45 8
2029 -27 -27 18 -126 -10 -92 -20 48 45 8 2029 -75 -75 -30 -174 86 -44 28 48 45 8
2030 9 9 54 -90 14 -78 -6 48 45 8 2030 -39 -39 6 -138 110 -30 42 48 45 8
2031 24 24 72 -72 24 -72 0 48 45 8 2031 -24 -24 24 -120 120 -24 48 48 45 8

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Summary—Change in Gross Issuance from Scenario 1 (in %)

Scenario 2 (%) Scenario 3 (%)

Calendar 5Y 10Y 30Y Calendar 5Y 10Y 30Y

2Y 3Y 5Y 7Y 10Y 20Y 30Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Year TIPS TIPS TIPS Year TIPS TIPS TIPS
2022 -19 -19 -19 -19 -19 -19 -19 18 10 11 2022 -19 -19 -15 -26 -10 -28 -14 18 10 11
2023 -35 -34 -34 -35 -34 -33 -33 35 24 22 2023 -35 -34 -28 -48 -19 -49 -25 35 24 22
2024 -35 -34 -34 -35 -34 -33 -33 53 38 33 2024 -35 -34 -28 -48 -19 -49 -25 53 38 33
2025 -32 -32 -32 -32 -32 -32 -32 71 51 44 2025 -32 -32 -26 -45 -17 -48 -24 71 51 44
2026 -24 -25 -25 -24 -25 -25 -25 71 51 44 2026 -24 -25 -18 -37 -9 -41 -17 71 51 44
2027 -20 -21 -20 -19 -21 -20 -20 71 51 44 2027 -20 -21 -13 -32 -5 -36 -12 71 51 44
2028 -14 -15 -15 -15 -14 -15 -15 71 51 44 2028 -14 -15 -8 -27 1 -31 -7 71 51 44
2029 -7 -7 -7 -7 -7 -7 -7 71 51 44 2029 -7 -7 -1 -20 8 -23 1 71 51 44
2030 -2 -2 -2 -2 -2 -2 -2 71 51 44 2030 -2 -2 4 -15 13 -18 6 71 51 44
2031 0 0 0 0 0 0 0 71 51 44 2031 0 0 7 -13 15 -16 8 71 51 44

Scenario 4 (%) Scenario 5 (%)

Calendar 5Y 10Y 30Y Calendar 5Y 10Y 30Y

2Y 3Y 5Y 7Y 10Y 20Y 30Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Year TIPS TIPS TIPS Year TIPS TIPS TIPS
2022 -17 -17 -13 -24 -15 -32 -19 18 10 11 2022 -21 -21 -17 -28 -4 -24 -9 18 10 11
2023 -32 -31 -25 -45 -29 -57 -33 35 24 22 2023 -38 -38 -31 -52 -9 -41 -17 35 24 22
2024 -32 -31 -25 -45 -29 -57 -33 53 38 33 2024 -38 -38 -31 -52 -9 -41 -17 53 38 33
2025 -29 -29 -23 -42 -27 -56 -32 71 51 44 2025 -35 -36 -29 -48 -6 -40 -16 71 51 44
2026 -21 -21 -15 -34 -20 -49 -25 71 51 44 2026 -28 -28 -21 -41 1 -33 -9 71 51 44
2027 -17 -17 -10 -29 -15 -44 -20 71 51 44 2027 -23 -24 -16 -35 5 -28 -4 71 51 44
2028 -11 -11 -5 -24 -9 -39 -15 71 51 44 2028 -18 -18 -11 -31 11 -23 1 71 51 44
2029 -4 -4 2 -17 -2 -31 -7 71 51 44 2029 -10 -11 -4 -23 18 -15 9 71 51 44
2030 1 1 7 -12 3 -26 -2 71 51 44 2030 -5 -6 1 -19 24 -10 14 71 51 44
2031 3 3 10 -10 5 -24 0 71 51 44 2031 -3 -3 3 -16 26 -8 16 71 51 44

30