U.S. Treasury borrowing committee backs steady auction sizes as FY2027 funding pressures build

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Treasury backs steady auctions

Highlights

Treasury Borrowing Advisory Committee unanimously recommends maintaining current auction sizes for nominal coupon, floating rate note, and TIPS in coming quarters.
Treasury staff report FY2026 receipts increase by 272% ($128 billion) from customs deposits, while Health and Human Services outlays rise 7% ($59 billion) on Medicare and Medicaid.
Median primary dealer raises FY2026-28 net borrowing estimate by nearly $300 billion, implying a $1.3 trillion funding gap in FY2027-28 under current issuance levels.

Committee review of financing outlook

As reported by the U.S. Department of the Treasury, the Treasury Borrowing Advisory Committee unanimously recommends keeping nominal coupon, floating rate note, and Treasury Inflation-Protected Securities auction sizes at current levels for the coming quarters.

During the closed-door meeting, Treasury staff say receipts through the second quarter of FY2026 are lifted by a 272% increase, or $128 billion, in customs deposits tied to higher tariff revenue, alongside gains in withheld and non-withheld taxes. Outlays rise most at the Department of Health and Human Services, up 7%, or $59 billion, because of higher Medicare and Medicaid spending, while several other outlays decline, led by lower disbursements at the Environmental Protection Agency, the Federal Emergency Management Agency, and the Department of Education.

Treasury officials also say the median primary dealer raises its aggregate FY2026-28 estimate for privately held net marketable borrowing by nearly $300 billion. While current issuance sizes are seen as adequate for the rest of FY2026, that borrowing outlook implies a $1.3 trillion funding gap in FY2027-28 under current coupon auction sizes and bill supply.

Market structure changes and policy implications

Primary dealers tell the committee that recent bank regulation changes are helping Treasury market functioning and are likely to support additional demand for Treasury securities from depository institutions. They also say the shift toward expanded central clearing remains important, although operational and implementation issues still need to be resolved before the December 2026 deadline for securities and the June 2027 deadline for repo.

The committee also examines whether Treasury should invest excess cash in the overnight Treasury repo market instead of holding nearly all balances in the Treasury General Account at the Federal Reserve. Members conclude such a move could generate returns, but only if the spread between repo income and the interest rate on reserve balances remains favorable, and they say further study is needed on execution, market impact, and risk management.

Dealers continue to expect Treasury to remain well positioned to meet projected financing needs through FY2026, with any near-term adjustments likely to come through bill supply. They generally anticipate nominal coupon auction sizes may rise in early CY2027, and the committee says increases in coupon issuance could be warranted in FY2027, while also discussing possible changes to Treasury's forward guidance.

In our earlier article on the recent rise in U.S. gasoline prices, we noted that fuel costs jumped from late February, with California topping $6 a gallon and the national average staying above $4 amid wide state-by-state gaps. We also outlined how supply risks tied to U.S.-Iran tensions around the Strait of Hormuz, seasonal fuel blend changes, and refinery outages were tightening the market and making the summer price outlook unusually uncertain.

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