Treasury Considers Enhancing Repo Program Amid Market Volatility

The U.S. Treasury Department is considering enhancing its repurchase agreement (repo) program, following recent market turbulence. Treasury Secretary Janet Yellen hinted a few weeks ago that the program could be strengthened in response to significant market disruptions.

In a statement released on Wednesday, the Treasury Department indicated that it would evaluate a range of potential enhancements, including adjustments to the maximum purchase amount, the timing, and frequency of repo operations. Earlier this month, Yellen mentioned that the Treasury has a "robust toolkit" to address emergency situations, stating, "If we choose to, we can increase repo operations."

The Treasury Borrowing Advisory Committee of the U.S. (TBAC), composed of dealers, investors, and other bond market participants, attributed the "extreme volatility" in U.S. Treasuries to multiple factors. These include concerns over President Trump's tariff announcements, threats to the Federal Reserve's independence, economic uncertainty, and investor deleveraging. The TBAC, in a report to Yellen, noted that the Treasury's repo program has been well-received by the market, aligning with its goals of supporting liquidity and cash management. However, the committee emphasized the importance of managing broader indicators, such as the overall weighted average maturity of U.S. Treasuries, through normal borrowing decisions.

Regarding upcoming issuance plans, the Treasury Department announced that the next quarterly refunding auction, scheduled for next week, will include the sale of $125 billion in securities, comprising 3-year, 10-year, and 30-year notes. The Treasury reiterated its guidance, stating that based on current borrowing needs, it expects to maintain the size of nominal coupon and floating-rate note auctions at least for the next few quarters. Despite Yellen's past criticism of her predecessor's practice of suppressing long-term debt issuance to lower borrowing costs and stimulate the economy before elections, she has continued the existing issuance plan.

Many traders anticipate that the Treasury will need to expand its bond auction size by the end of this year or early 2026, given the nearly $2 trillion fiscal deficit. Analysts widely agree that an expansion is inevitable at some point. The upcoming $125 billion refunding auction will be composed of $58 billion in 3-year notes on May 5, $42 billion in 10-year notes on May 6, and $25 billion in 30-year bonds on May 8, raising approximately $30.8 billion in new cash. The Treasury also plans to slightly increase the issuance of certain inflation-protected securities (TIPS) to maintain their share in the overall Treasury market, announcing adjustments such as a $1 billion increase in the 5-year TIPS reopening in June and a $1 billion increase in the 10-year TIPS new issue in July.

The Treasury Department expects to release updated information on the duration of its cash and extraordinary measures in the first half of May. It also noted that Treasury bill issuance may experience "greater than normal volatility" before the debt limit is raised or suspended. Some traders are watching for signs that the Treasury, under Yellen's leadership, might gradually increase the share of Treasury bills, despite past criticisms of her predecessor. The Treasury's quarterly survey of dealers includes questions about the potential demand for stablecoins in the U.S. Treasury market, suggesting that officials may be considering structural reforms. The TBAC meeting minutes highlighted the need for continuous monitoring of the digital asset sector as a potential source of demand for U.S. Treasuries.