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BOFA FLOATS "REVERSE INQUIRY WINDOW" TO EASE US TREASURY LONG-END PRESSURE

With 30-year U.S. Treasury yields US30YT=RR breaching 5% and weak demand for longer-dated U.S. government debt, Bank of America argues that the Treasury could introduce a "reverse inquiry window" - a mechanism that would allow end users to come directly to the government to buy the debt, bypassing traditional auctions.

Rising deficits require growing debt issuance even as investors demand higher yields to compensate for inflation risk and fiscal concerns. But BofA analysts led by Ralph Axel argue the long end is already oversupplied.

Under the proposed structure, Treasury would issue securities directly to end users, initially focused on very long-end maturities, based on their inquiries. It may require a minimum size, such as $100 million, and charge a small fee.

If demand is strong, the Treasury could reduce long-dated auction sizes. If it is weak, then the government could close the program at minimal cost.

BofA argues the idea does not violate Treasury's "regular and predictable" issuance framework. The concept has precedent among GSEs like Fannie Mae and Freddie Mac, but hasn’t been used by a major sovereign debt issuer. It was briefly raised by the Treasury Borrowing Advisory Committee after the 2013 "taper tantrum" before being set aside.

If successful, the window could allow Treasury to gradually reduce long-end auction sizes, narrowing the roughly 85-basis-point yield premium on 30-year Treasuries over overnight index swaps — lowering federal interest costs and feeding through to mortgage rates.

(Karen Brettell)

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