Treasury Yield Curve & Debt Strategy Engine

Policy Brief: Model the macroeconomic feedback loops of US Treasury quarterly refunding choices. Shifting the issuance mix between short-dated T-Bills and long-dated coupon bonds alters duration risk extraction, drives preferred-habitat supply shocks along the sovereign yield curve, and can either reinforce or frictionally counteract Federal Reserve Quantitative Tightening (QT).

Refunding Issuance Mix 100% Total

Strategy Presets Baseline TBAC

Short-Term T-Bills (1M–1Y) 22.5%

Low term premium, high immediate rollover vulnerability. TBAC benchmark: 15–20% range.

Intermediate Notes (2Y–10Y) 57.5%

Core benchmark tenors (2Y, 5Y, 10Y). Absorbs broad institutional duration flows.

Long-Term Bonds (20Y–30Y) 20.0%

Locks in multi-decade borrowing costs. Heavy issuance extracts heavy duration premium.

Allocated Portfolio Share

■ Bills: 22.5% ■ Notes: 57.5% ■ Bonds: 20.0%

Macroeconomic Environment

Fed Stance

RRP / Liquidity Buffer

Annual Net Borrowing Need ($ Trillions) $1.90T

US Sovereign Yield Curve Impact

Baseline Curve (dashed slate) vs. Simulated Issuance Curve (solid gold) with supply-elasticity term premium shifts

Baseline (TBAC Std)

Simulated Mix

2Y / 10Y Slope +22.0 bps Δ 0.0 bps

3M / 10Y Spread -48.0 bps Δ 0.0 bps

5Y / 30Y Spread +38.0 bps Δ 0.0 bps

10Y Term Premium +34.0 bps Δ 0.0 bps

Fed Policy Clash Index Low Friction

28 / 100 Friction Score

0 (Harmonious) 50 (Moderate Strain) 100 (Severe QT Clash)

Issuing within standard TBAC boundaries maintains orderly transmission of Federal Reserve interest rate policy without draining bank reserves prematurely.

Net Interest Expense Delta Baseline Refunding

$0.0B vs Baseline (Yr 1)

3-Yr Cum. Delta: $0.0B 5-Yr Cum. Delta: $0.0B

Front-loading short bills reduces initial yield vs long coupons in an inverted curve, but increases future refinancing sensitivity when rates stay elevated.

Refinancing & Rollover Wall Manageable

$7.42T 12M Rollover Volume

WAM: 71.8 Months Share Due <1Y:

Weighted Average Maturity (WAM) measures portfolio interest-rate vulnerability. Shorter WAM leaves the federal balance sheet exposed to rapid rate hikes.

Primary Dealer Absorption Ample Liquidity

0.4 bps Avg Auction Tail

Bid-to-Cover Est: 2.52x Dealer Balance Sheet Load: Normal

Estimates concession pressure required at Treasury auctions to clear new coupon supply against private sector balance sheet constraints.

Tenor-by-Tenor Yield & Supply Distribution Table 11 Sovereign Points

Tenor	Category	Baseline Yield	Simulated Yield	Net Shift (bps)	Term Prem. Shift	Sim. Annual Issuance

Macroeconomic Methodology & Analytical Mechanics

1. Preferred Habitat & Supply Elasticity

Traditional expectations hypothesis posits that long-term yields merely reflect the expected path of short rates. In contrast, Vayanos-Vila (2021) Preferred Habitat theory shows that clienteles (pension funds, insurers, foreign reserves) have strict maturity preferences. Strategic supply shifts extract or inject localized duration risk, altering term premia along the curve.

2. Treasury-Fed Policy Clash ("Shadow Easing")

When the Federal Reserve conducts Quantitative Tightening (QT) by letting coupon bonds roll off its balance sheet, it seeks to tighten broad financial conditions by raising long-term borrowing costs. If the Treasury concurrently tilts issuance heavily into short T-Bills ("Bessent-style front loading"), it removes duration risk from private markets, neutralizing QT effects.

3. TBAC Prudent Issuance Benchmark

The Treasury Borrowing Advisory Committee (TBAC) historical recommendation maintains short-term T-bills at 15% to 20% of total sovereign debt. Exceeding 25–35% exposes the federal government to severe refinancing cliffs if inflation resurges, while depressing intermediate note and long bond liquidity.