FICC Research

Interest Rates
8 July 2025

US Rates Research

Wrapping up the big beautiful bill SIGNATURE

We look at the implications of the just-passed BBB for budget
deficits, Treasury issuance and markets. We expect deficits to
remain elevated, but net issuance of notes/bonds to investors Anshul Pradhan
+1 212 412 3681
to fall as the Treasury raises the share of T-bills in outstanding [email protected]
BCI, US
debt. This should help compress term premium.
Amrut Nashikkar
+1 212 412 1848
We appreciate your 5-star vote in the 2025 Extel Global Fixed-Income Research Survey in the [email protected]
USA: Economics & Strategy: U.S. Rates Strategy, Short-duration, TIPS and Interest Rate BCI, US
Derivatives categories. View our analysts » Vote 5 Stars for Barclays »
Andres Mok, CFA
+1 212 526 8690
Key Takeaways [email protected]
BCI, US
• Budget deficits are likely to remain about 6.5% of GDP, as net new tax cuts are offset by tariff
revenues and spending cuts. In $ terms, the deficit will still rise from about $1.9trn in FY25 to Samuel Earl
$2.2trn in FY28 and $2.9trn in FY34. Higher budget deficits are, however, unlikely to translate + 1 212 526 5426
into higher net issuance of notes/bonds to investors (ex-Fed) for several years. We expect that [email protected]
BCI, US
actually to fall from $1.75trn in CY 25 to about $1.2trn in CY 26 and CY 27.
Jonathan Hill, CFA
• Judging from Secretary Bessent's comments, the Treasury is in no rush to term out debt, +1 212 526 3497
reflecting elevated long-term rates in outright terms, as well as versus the expected policy [email protected]
rate path. He also views stablecoins as significantly increasing demand for T-bills, suggesting BCI, US
comfort with a higher share of T-bills than in recent history. We expect the Treasury to Demi Hu
continue to emphasize this demand channel. +1 212 526 7398
[email protected]
• We expect the Treasury to keep coupon auctions sizes unchanged for all of next year, with BCI, US
modest increases beginning in early 2027. Were it to keep them unchanged through 2027, the
Eveline Dong
share of T-bills would rise from 22% at YE 25 to 25% by YE 27. While still in line with historical
+1 212 526 9576
averages, annual net issuance of T-bills to investors would rise to $1.0trn in 2027, which may [email protected]
be too high for its comfort. BCI, US

• We expect 2y-7y issue sizes to be 15-20% higher in 2027 and those further out to remain
unchanged. For TIPS, we project further increases in auction sizes at the 5y and 10y tenors,
while 30y remains unchanged. The buyback program is likely to be scaled up later this year.
The WAM should drift lower towards the historical range.

• Gross issuance over 2026 and 2027 would be about $700bn lower in 10y-equivalent terms
than versus the counterfactual of the Treasury raising auction sizes across the curve, with a
goal of bringing the share of T-bills to about 20% by YE 27. We believe that is worth about
25bp in 10y term premium.

This document is intended for institutional investors and is not subject to all of the
independence and disclosure standards applicable to debt research reports prepared for retail
investors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for its
own account and on a discretionary basis on behalf of certain clients. Such trading interests
may be contrary to the recommendations offered in this report.
Please see analyst certifications and important disclosures beginning on page 15.
Barclays | US Rates Research

• At the refunding meeting, we expect the Treasury to reiterate that it "anticipates maintaining
nominal coupon and FRN auction sizes for at least the next several quarters." With the debt
limit raised, it would rely heavily on T-bills to raise the cash balance quickly. We expect net T-
bill issuance of $830bn in H2 25 and annual net issuance to average $700-800bn in CY 26-27.

• Separately, the Fed has been shrinking its Treasury portfolio for some time now, by $475bn in
2024 and $120bn in 2025. We expect QT to end by March 2026 and the Fed to become a buyer
of USTs as it reinvests mortgage pay-downs into the Treasury market and eventually expands
the balance sheet in 2027 to keep up with rising demand for reserves.

Market implications
• Duration: For a terminal fed funds rate pricing of 3-3.25%, we expect 10y and 30y yields to
decline to 4.2% and 4.6% by year-end, respectively, 20-30bp below market pricing as term
premium compresses. For a more meaningful persistent move either way, the market needs
to reassess the terminal rate.

• Curve: The Treasury yield curve should remain steep as the Fed lowers the policy rate, but
less than implied by forwards. The 1y forward 2s30s Treasury curve should be about 100bp,
as opposed to the market-implied curve of 125bp.

• Money markets: We expect T-bills to cheapen relative to OIS and SOFR to rise vs. fed funds
amid the rapid increase in net T-bill issuance over the coming months. However, given the
current and expected level of money market fund assets and starting share of T-bills, such
cheapening should be modest.

• Inflation: A term premium compression should put more downward pressure on real yields
than breakevens, especially further out the curve, given that breakevens reflect only modest
inflation risk premium.

• Swap Spreads: Swap spreads should widen somewhat as markets digest the deficit and
issuance implications of the reconciliation bill. The lowering of eSLR, along with potential
exclusion of Treasuries, should also support wider spreads.

• Volatility: The passage of the bill is negative for short expiry/long tenor volatility. It should
also flatten payer skew in 30y tenors to make it more consistent with shorter tenors, where
skew is negative. But the rising US debt load supports a steeper forward vol surface.

• In terms of trades, we maintain our recommendations to be long 5yf 5y USTs, 3y swap

spread wideners, long 0.5 beta-weighted 30y breakevens and 3m expiry 2s30s 1:1 floor
spreads.

Budget Deficits: Where do we land?

With the bill now having been made into law, we first look at its budget deficit implications.

Figure 1 tabulates the annual budget deficit numbers, starting from the latest CBO baseline
under current law (which assumes TCJA tax cuts expire) and incorporating the initial score of
the Senate plan (and assuming that expiring new tax provisions are made permanent). The
budget deficit would rise from 6.6% in 2025 to about 7.1% of GDP in FY 26 and FY 27 and rise
further to about 7.6% in a decade's time. This is somewhat more expansionary than the current
policy baseline (of maintaining the current tax rates). On a 10y basis, tax provisions increase
primary deficits about $5.3trn (assuming permanence, versus scored of $4.5trn). This is partly
offset by spending cuts of $1.2trn, resulting in a net primary deficit increase of $4.1trn; just the
extension of TCJA would have cost $3.8trn.

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Barclays | US Rates Research

These numbers, however, do not include tariff revenues. Assuming an $200bn/year run-
rate (at the weighted average tariff rate of about 15%1 ) would result in a better profile. Figure 1
shows that budget deficits as a share of GDP would remain about 6.5% and rise modestly in the
second half. On a 10y basis, the cost would drop to about $2trn, but not as fiscally profligate as
the current policy. Needless to say, there is significant uncertainty about tariff policy that far
out, but over the next few years, there are likely to be significant tariff revenues.

FIGURE 1. Budget deficits are likely to stay in a 6-handle as a share of GDP

$bn 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
CBO Jan'25 Baseline
-1,907 -1,865 -1,713 -1,687 -1,795 -2,054 -2,140 -2,233 -2,371 -2,481 -2,586
Deficits
Senate Tax Plan
-131 -460 -581 -578 -530 -540 -560 -580 -650 -700
(Permanent)
Spending Cuts -19 -8 42 88 132 176 204 206 221
Additional Interest Cost -24 -48 -69 -87 -103 -119 -134 -152 -171
Resulting Budget Deficit -1,907 -1,996 -2,217 -2,323 -2,400 -2,584 -2,651 -2,736 -2,880 -3,077 -3,236
Deficits, % GDP -6.6% -6.6% -7.1% -7.1% -7.1% -7.4% -7.3% -7.2% -7.3% -7.5% -7.6%
Deficits, % GDP, TCJA Ext. -6.6% -6.5% -6.2% -6.7% -6.7% -7.3% -7.3% -7.3% -7.5% -7.6% -7.6%

Budget Deficit, with tariff

-1,907 -1,898 -2,009 -2,102 -2,163 -2,330 -2,381 -2,446 -2,572 -2,746 -2,888
revenues
Deficits, % GDP, with
-6.6% -6.3% -6.4% -6.5% -6.4% -6.6% -6.5% -6.5% -6.6% -6.7% -6.8%
tariff rev

Memo - Tariff Revenues 98 196 201 209 217 225 235 244 255 262
Source: CBO, CRFB, Barclays Research

Figure 2, Figure 3 and Figure 4 show revenues and primary outlays as a share of GDP. Total
revenues (with tariffs) are expected to rise slowly towards long-term averages, though primary
outlays are likely to remain above. As a result, the primary balance remains negative. Unless
interest rates fall meaningfully below nominal GDP growth, debt/GDP ratio would keep rising,
albeit modestly. We expect the debt/GDP ratio to rise to about 129% by YE 34 under the Senate
plan and 123% with tariff revenues. Both of these are higher than current law forecasts of 117%,
but the latter is below the current policy forecast of 128% (Figure 5).

Overall, those looking for fiscal consolidation and a falling deficit/GDP ratio will be
disappointed. However, those with realistic expectations of a unified government, Republican
or Democratic, having a history of blowing up deficits will not be surprised.

1
https://www.cbo.gov/publication/61389

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Barclays | US Rates Research

FIGURE 2. Primary deficits are likely to persist... FIGURE 3. ... because while revenues should be not far below
historical averages...

6 % of GDP 21 % of GDP
4
20
2
0 19
-2 18
-4
-6 17

-8 Primary deficits, CBO Baseline 16 Revenues, CBO Baseline

-10 Avg. Primary deficits Avg. Revenues
Primary deficits, BBB 15
-12 Revenues, BBB
Primary deficits, +tariff rev Revenues,BBB + tariffs
-14 14
1975 1985 1995 2005 2015 2025 2035 1975 1985 1995 2005 2015 2025 2035
% of GDP
Source: CBO, CRFB, Barclays Research Source: CBO, CRFB, Barclays Research

FIGURE 4. ...primary outlays are likely to be high FIGURE 5. The debt/GDP ratio is likely to rise, but not far away from
the current policy baseline

30 % of GDP Debt/GDP Ratio by 2034, %

Outlays ex. Interest, CBO Baseline
28 140%
Avg. Outlays ex. int
128% 129%
26 Outlays, BBB 130% 127%
123%
24
120% 117%
22

20 110%

18 100% 98%

16
90%
14 Debt/GDP - CBO Baseline TCJA Extension Senate Plan Senate Plan Senate Plan
YE24 (Permanent) (Permanent) +
1975 1985 1995 2005 2015 2025 2035 Tariff Revenues

Source: CBO, CRFB, Barclays Research Source: CBO, CRFB, Barclays Research

Treasury Issuance: T-Bills to the rescue

As can be seen above, budget deficits are likely to remain elevated, at about $2trn in FY2026,
rising to $2.2trn in FY28 and $2.9trn in FY34. The Treasury has to figure out the composition of
issuance as it goes about financing these deficits.

It has a stated objective to "fund the government at the least cost to the taxpayer over
time." On an ex-ante basis, term premium represents the cost of issuing long-term debt versus
rolling over T-bills. When it is high, it would make sense to lean towards short-term debt and
when low, towards long-term debt. We are currently in a high term premium world. In a recent
interview, when asked "At what point do you start issuing at longer-dated maturities?" Treasury
Secretary Bessent replied, "Well, why would we do it at these rates? We are more than 1
standard deviation above the long-term... rate, so why would we do that? The time to have
done that would have been in ’20, ’21, ’22."2

2
https://blinks.bloomberg.com/news/stories/SYPQCTDWLU68

8 July 2025 4
Barclays | US Rates Research

Figure 6 shows 30y yields, both outright and relative to survey-based expectations of the policy
rate (using a combination of near-term policy and neutral rate expectations). For instance, 30y
yields are trading at 4.9%, back to the levels that prevailed pre-GFC, despite estimates of the
neutral rate having fallen almost 150bp since then. As a result, the 30y survey-based term
premium is about 175bp. To put that in perspective, since 2022, it has averaged 125bp, post-GFC
to pre-COVID 1bp, and pre-GFC (from early 2000 to 2006) 70bp.

Hence, currently it is very costly to issue long-term debt.

FIGURE 6. Term premium is elevated in a historical context

Source: Federal Reserve, Barclays Research

In the optimal issuance exercise that the Treasury frequently conducts, it has concluded that
the "model continues to favor belly issuance under higher term premium assumptions, and also
shows a significant additional increase in the relative cost of longer-dated issuance in the higher
term premium scenarios."3 Figure 7 shows there is some benefit to moving from 2s to 7s in
terms of reducing standard deviation of deficits even as the cost of debt servicing rises, but not
beyond that. With heightened sensitivity to the cost, one may argue that the sweet spot is
further in, towards T-bills.

Bessent has also argued that "A thriving stablecoin ecosystem will drive demand from the
private sector for US Treasuries, which back stablecoins. This newfound demand could lower
government borrowing costs and help rein in the national debt. It could also on ramp millions of
new users—across the globe—to the dollar-based digital asset economy."4

Figure 8 shows that the share of T-bills in outstanding debt has risen from as low as 10% in 2015
to about 22% currently, but this is still below the 25% or so average pre-GFC, which, in our view,
is a more appropriate benchmark, given elevated term premium. Hence, we do not see the
current share of T-bills as a hurdle to leaning towards them.

3
https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ32023.pdf
4
https://x.com/SecScottBessent/status/1935027160374210573

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Barclays | US Rates Research

FIGURE 7. Optimal issuance is closer to the front to intermediate FIGURE 8. Share of bills is below pre-GFC levels
sector in a high term premium scenario

7
30
6 20 30
Debt Service (% of GDP)

5 10

7 10
4 5
3 5
Nominal 2
2
3 TIPS
Bill
FRN
2
2 2.2 2.4 2.6 2.8 3
Stdev Deficit (% of GDP)

https://home.treasury.gov/system/files/221/
CombinedChargesforArchivesQ32023.pdf
Source: US Treasury, Barclays Research Source: US Treasury, Barclays Research

What does it mean for coupon issuance?

We think the Treasury can maintain current sizes for quite a while. At the most recent refunding
meeting, it noted, "Based on current projected borrowing needs, Treasury anticipates
maintaining nominal coupon and FRN auction sizes for at least the next several quarters." We
believe it can continue to repeat that.

Figure 9 shows the annual issuance numbers, assuming the deficit picture laid out above and
that the Treasury keeps auction sizes unchanged through the end of 2027. We also expect the
Fed's QT to end by March 2026 and it to become a buyer of USTs as it reinvests mortgage pay-
downs into the Treasury market and eventually expands the balance sheet in 2027 to keep up
with rising demand for reserves.

Overall, the Treasury would need to raise about $1.96trn from the market in 2026 and $1.84trn
in 2027. If it maintains coupon sizes unchanged, it would raise about $1.16trn and $0.82trn in
2026 and 2027, respectively, from the notes/bonds universe, resulting in net issuance of T-bills
of $0.8trn and $1trn in 2026 and 2027. The share of T-bills would rise from 21.8% at YE 25 to
about 23% by YE 26 and 25% by YE 27. The 25% share is broadly in line with pre-GFC levels
(Figure 8).

Overall, this suggests that the Treasury can continue to keep sizes unchanged for a while.

FIGURE 9. Assuming unchanged auction sizes, the share of T-bills would rise to 25% by YE 27; higher
auction sizes in 2027 would keep net T-bill issuance below $1trn

Unchanged Sizes Higher

Calendar year 2023 2024 2025 2026 2027 2027

Financing need (Deficits/Others) 2,058 1,937 1,914 2,080 2,170 2,170
Change in Cash balance 322 -48 129 0 0 0
Fed's reduction in Tsy portfolio 720 475 120 -118 -326 -326
Net Tsy Issuance to investors 3,100 2,364 2,163 1,963 1,844 1,844

Total N/B Issuance (A) 3,554 4,503 4,815 4,875 4,863 5,258
Issuance to public 3,350 4,311 4,390 4,395 4,395 4,790

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Unchanged Sizes Higher

Calendar year 2023 2024 2025 2026 2027 2027

SOMA Addons 204 192 425 480 468 468
Redemptions (B) 3,128 3,165 3,188 3,623 3,912 3,912
Maturing 3,128 3,104 3,058 3,443 3,732 3,732
Buybacks 0 61 130 180 180 180
Net Issuance of Notes/Bonds (A-
426 1,338 1,627 1,252 951 1,346
B)
SOMA Net Notes/Bonds 647 453 120 -91 -136 -136
Net Notes/Bonds to Investors 1,073 1,791 1,747 1,161 815 1,210
Net Bills to investors 2,027 573 416 802 1,029 634

Bills, % Debt 21.5% 21.9% 21.8% 22.9% 25.0% 23.9%

Source: US Treasury, CBO, New York Fed, Barclays Research

We have penciled in increases in auction sizes starting in early 2027, as we believe that even as
the 25% share of T-bills is not far pre-GFC range, the $1.0trn of bill issuance in 2027 alone (or
almost 60% of total net issuance) would likely be too high for the Treasury's comfort. However,
the required increases are still likely to be modest. Figure 10 shows that we expect a 15-20%
increase in issue sizes from 2y to 7y by YE 27.

We do not expect any change in 10y, 20y and 30y issue sizes. While we believe the high level
of term premium does argue for outright reductions, the Treasury is likely to refrain from that,
given the general direction of travel for overall issuance. We think a more likely scenario is the
Treasury scaling up the buyback program (from $30bn/qtr to $45bn/qtr). It discussed various
enhancements to the buyback program at the most recent meeting, while highlighting cost
savings to tax payers.5

Figure 9 (last column) shows the annual issuance numbers with these assumptions. The share
of T-bills gradually rises, but annual net issuance of T-bills remains below $1trn. Overall, net
issuance of notes/bonds to investors falls to about $1.2trn each in 2026 and 2027. WAM of
the outstanding debt should drift lower, from 71 months to 67 months by YE 27. This is due
partly to a higher share of T-bills in the outstanding debt and partly to the lower WAM of the
notes/bonds universe (Figure 11). In 10y equivalent terms, the outstanding notes/bonds
universe should grow $950bn in 2026 and $1,070bn in 2027, versus $1.3trn on average in 2024
and 2025.

5
https://home.treasury.gov/news/press-releases/sb0120

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Barclays | US Rates Research

FIGURE 10. Auction sizes should rise modestly FIGURE 11. WAM is likely to decline

80 months

75

70

65

60

55

50
Average Maturity, Months
45
Barclays forecasts
40
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Source: US Treasury, Barclays Research Source: US Treasury, Barclays Research

TIPS issuance
For TIPS, we project further increases in auction sizes at the 5y and 10y tenors, while 30y
remains unchanged (Figure 12). This results in the August 30y reopening at $8bn, the
September 10y reopening at $19bn, and the October 5y new issue at an all-time record (for
TIPS, at least) of $26bn. We see further controlled auction size increases for 5y and 10y TIPS as
consistent with Treasury's guidance that "it would be prudent to continue with incremental
increases to TIPS auction sizes in order to maintain a stable share of TIPS as a percentage of
total marketable debt outstanding." Moreover, the Treasury has already been "terming in" TIPS
issuance, given that 30y auction sizes have not grown since 2021, while the WAM of TIPS
outstanding has been gradually declining (Figure 13).

However, by our projections, TIPS' market share is set to decline further into 2026, falling below
7% of marketable outstanding (Figure 14). At a high level, we see three potential solutions to
this problem: changing the guidance, more rapid increases auction sizes for current
benchmarks, and/or launch a new benchmark (for more details, see Theoretically
consequential, practically not, 29 May 2025). Which solution (or combination) the Treasury
ultimately chooses remains uncertain and will additionally be informed by whether the inflation
risk premium meaningfully returns to the US Treasury market (with negligible inflation risk
priced into the curve, the argument for TIPS over nominals is weakened) and how structural
flows to front-end TIPS materialize.

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Barclays | US Rates Research

FIGURE 12. TIPS auction size history

Source: US Treasury, Barclays Research

FIGURE 13. WAM of TIPS market outstanding FIGURE 14. TIPS' share of outstanding USTs

Source: FRBNY, US Treasury, Barclays Research Source: US Treasury, Barclays Research

How will BBB drive markets?

Duration and curve: Term premium compression
We believe the resulting level of budget deficits from the sum total of all the policies is
somewhat lower than what would have transpired under a simple TCJA extension. Further, the
issuance composition, the Treasury's targeting a higher share of T-bills and gradually reducing
the WAM of the outstanding debt should help compress the term premium.

For instance, versus the counterfactual of the Treasury's raising auction sizes across the curve
with a goal of bringing the share of T-bills to about 20% by YE 27, gross issuance over 2026 and
2027 would be about $700bn lower in 10y-equivalent terms. We believe that is worth about
25bp in term premium.

Where does that leave 10y and 30y yields? A bottom-up analysis rates and swap spreads
suggests 10y and 30y term premia should be 90bp and 130bp, respectively. This is broadly in
line with historical averages of the slope between longer tenors and the fed funds rate (Figure
15). Figure 16 shows the markets are pricing in a trough of the easing cycle at 3-3.25%, broadly
in line with estimates of the neutral rate. Still, 5y5y real rates are trading well above prevailing
estimates of the neutral rate, suggesting a high real term premium (Figure 17).

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Barclays | US Rates Research

Putting these together, for the given level of terminal fed funds rate, we expect 10y and
30y yields to fall to 4.2% and 4.6% by year-end, 20-30bp below current forwards. A term
premium compression should put more downward pressure on real yields than breakevens,
especially further out the curve, given that breakevens reflect only modest inflation risk
premium.

FIGURE 15. 10y and 30y term premia are above historical averages FIGURE 16. With a terminal rate of 3-3.25%, long-term yields should
be lower
Average slope Since 85 (with Current TP based
Since 85
(bp) FF>1%) on survey (bp) 6.0
path of short rate implied by 3m SOFR futures, %
FF-10y 134 102 117
5.5
FF-30y 180 133 174
5.0
10s-30s 47 31 57
4.5

4.0

3.5

3.0

2.5
Latest
2.0
Dec-23 Dec-24 Dec-25 Dec-26 Dec-27 Dec-28 Dec-29

Source: Bloomberg, Federal Reserve, Barclays Research Source: Bloomberg, Barclays Research

FIGURE 17. 5y5y real rates embed a high term premium

2.1%
1.89%
1.9%
1.7%
1.5% 1.40% 1.37%
1.26%
1.3% 1.16%
1.09%
1.1%
0.9% 0.78%
0.7%
0.5%
5y5y real rate (PCE) 2y2y real rate (PCE) NY Fed DSGE, 2028 Laubach Williams Fed's LR dot (avg) HLW

Real rates estimated using OIS rates and CPI swap rates adjusted for the basis between CPI and PCE
Source: Federal Reserve, Barclays Research

In a similar vein, we find the forward Treasury curve to be too steep. Figure 19 shows the 1yf
2s30s CMT curve is about 125bp, of which the SOFR curve is 75bp and the asset swap curve is
50bp. While it has been steeper, that was at a very low fed funds rate. At close to neutral policy
setting, the forward rate curve should not be this steep, in our view. As can be seen, a significant
portion of the steepness of the Treasury curve is coming from the asset swap curve. We believe
that skewing issuance away from the long end should help flatten the asset swap curve (or
steepen the swap spread curve).

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Barclays | US Rates Research

FIGURE 18. The forward 2s30s Treasury curve is too steep... FIGURE 19. ...as is the forward 2s10s Tsy curve
2015 2017 2019 2021 2023 2025

250 1yf 2s30s curve, bp 200 1yf 2s10s curve, bp

200
150
150
100
100

50 50

0
0
-50 Treasury CMT
-50 Treasury CMT
-100 SOFR swap SOFR swap
Asset swap spreads Asset swap spreads
-150 -100
2015 2017 2019 2021 2023 2025 2015 2017 2019 2021 2023 2025

1yf 2s30s curve, bp

Source: Barclays Research Source: Barclays Research

Money Markets: A modest cheapening

Passage of the reconciliation bill also raises the debt limit $5trn, which would allow Treasury to
rebuild the TGA by ramping up issuance in bills. For the second half of the year, we expect about
$830bn in net bills, assuming the TGA returns to its $850bn target by year-end (Figure 20). In
June 2023, after the previous debt limit episode, the Treasury issued about $475bn in bills over
the month to rebuild the TGA from a low of just $23bn. However, the TGA now stands at
about $370bn, so it has an ample cushion and may not need to issue bills at the same pace. If it
were to issue $200/month over July and August, and with quarterly tax receipts in September,
the TGA could reach $750bn by end-Q3. In Q4, we expect issuance of about $420bn, with the
TGA reaching $850bn by year-end.

When bills supply surged in 2023, hefty ONRRP balances provided an ample source of liquidity,
and money market funds reallocated into bills. But now ONRRP balances have dwindled and
investors are wondering how this supply will be absorbed. The spread between money market
yields and bank deposits is still quite attractive, at 170bp, and rather high from a historical
perspective, so households are likely to continue to move cash on deposit at banks into money
funds. Households have roughly $10trn in time and savings accounts, so have ample capacity to
do so. We estimate that even passive reinvestment of MMF income alone would fuel $275bn in
money fund growth over the next year (approx $7tn * 4%).

All in all, we think that the market can absorb this coming supply, albeit with some modest
cheapening in bills. We expect 3m bills to cheapen to about 3bp above OIS by the end of this
year and to 5bp next year (Figure 21). At the same time we expect SOFR to move closer to IORB,
and as the TGA drains and bank reserves move toward $2.8trn by year-end, FF should also move
up, albeit more slowly. We expect SOFR/FF to move to -3bp by September (the average was
+1.5bp in June) and -4bp by December (outside of quarter- and year-end).

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FIGURE 20. Net issuance of T-bills quarterly FIGURE 21. Evolution of short rates
Money market
Sep-25 Dec-25 Mar-26 Jun-26 Sep-26 Dec-26
rates (%)
600 Net bill issuance ($bn)
469 Upper target 4.50 4.25 4.00 3.75 3.50 3.50
500 414 421
371 Fed funds effective 4.33 4.10 3.87 3.63 3.38 3.38
400
291
300 Lower target 4.25 4.00 3.75 3.50 3.25 3.25
200 SOFR 4.36 4.14 3.90 3.65 3.40 3.40
100 IORB 4.40 4.15 3.90 3.65 3.40 3.40
0 RRP 4.25 4.00 3.75 3.50 3.25 3.25
-100
3m OIS 4.29 4.08 3.84 3.59 3.38 3.38
-200
3m SOFR 4.32 4.11 3.86 3.61 3.40 3.40
-300
3m bill - OIS (bp) 1 3 5 4 4 5
-400 -330
Q3'25 Q4'25 Q1'26 Q2'26 Q3'26 Q4'26

Source: US Treasury, Barclays Research Source: Barclays Research

Swap Spreads: Modest widening in spreads

Taken together with all the other policy changes, such as the effect of tariffs, the "Big Beautiful
Bill" is expected to keep deficits at about 6.5% of GDP over the coming decade. The average
annual expected deficit has been the most significant factor determining the level of long-tenor
swap spreads (Figure 22), and the latter appear to be priced for deficits of this magnitude.

Further, the Treasury is likely to be flexible with its issuance strategy, leaning more heavily on T-
bills. As a result, it can delay increasing coupon sizes until 2027, and those would also be
concentrated in shorter tenors. Proposed changes to lower SLR requirements for large GSIBs
and the potential exclusion of USTs should ease balance sheet constraints. Along with the
Treasury's issuance strategy, this should provide support for spreads, especially in the front and
intermediate sector.

In the near term, there are some headwinds. The passage of the bill also suspends the debt
ceiling, clearing the way for the Treasury to ramp up bills supply to replenish its cash balance at
the TGA. An increase in bill yields typically puts upward pressure on repo and tightens front-end
spreads, given the balance sheet constraint in funding markets. However, we believe the market
can absorb the supply deluge, so the extent of bills cheapening should be modest.

The market is pricing SOFR to trade about 3bp above fed funds over the next three months and
about 5bp above in the following three months, on average. These are near historical extremes
outside of stress periods (eg, the 2019 repo crisis and early 2029 COVID shock) (Figure 23), and
we believe this is reflected in the pricing of swap spreads. SLR relief should also be positive for
front-to-belly spreads, where it offers the most economic upside for banks (see here) when
taking into account their return potential relative to the market risk.

8 July 2025 12
Barclays | US Rates Research

FIGURE 22. Projected deficits (% GDP) and 30y swap spreads FIGURE 23. Front-end (2y) swap spreads tightens when market prices
SOFR to trade above fed funds

bp %GDP 20 Wider spreads

150 4
10
110 2

2y SOFR spread (bp)

0
70 0 Current
-10
30 -2
-20
-10 -4
-30
Tighter spreads
-50 -6 -40
Ample liquidity/funding Repo/funding pressure
-90 -8 -50
1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 -15 -10 -5 0 5 10 15
3m SOFR vs Fed Funds OIS (bp)
30y spreads CBO 10y avg projected deficit (%GDP)

Libor-based spreads shown. Positive on x-axis shown as 3m SOFR trading above 3m fed funds.
Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research

Interest Rate Volatility: Short gamma should continue to do well, but

rising debt is supportive of medium- and long-expiry vol
Fiscal risk became a point of focus for the vol market last month as the market reacted to a
potential increase in fiscal deficits relative to the baseline, amid fears of decreasing appetite for
long-end duration. Volatility, which had already increased after the April "Liberation Day"
announcement, was further boosted by long-end Treasury yields rising above five percent, and
payer skew richened as market participants increasingly bought long-dated protection. Our
view has been that the likelihood of a large fiscal-driven long-end selloff should be low.

Interest rate volatility has been declining over the past month (Figure 23), because data have
held up and because the market is now pricing a more compressed distribution for long-tenor
rates. But realized volatility has been even lower, and the ratio of implied to realized volatility
continues to be highest in 30y tenors (Figure 24), with the exception of 1m expiries. Overall, the
market continues to assign a very high vol risk premium to 30y tenors.

The payer skew has also declined, although it remains positive in all expiries and the 30y tenor
(which is very different from the shape of the skew in shorter tenors). The passage of the bill is
likely further to reduce the market's focus on fiscal risk over the summer and should be negative
for short-expiry volatility, as well as the skew. The elevated RHS vol risk premium sets the stage
for further outperformance by systematic short-gamma strategies over the summer.

The interest rate sensitivity of deficits will be more of an issue

However, one factor that is not being discussed in the market is that high levels of debt/GDP in
the future make the path of deficits much more sensitive to the level of rates than has been in
the past. For example, a rate path that is 100bp higher leads to a rise in average deficits of
about $300bn per year and raises the amount of Treasuries that will need to be absorbed
(causing term premium to rise further). Conversely, a lower rate path would result in lower
deficit and lower Treasury supply. Over the medium- to long-term horizon, this feedback loop is
likely to keep interest rate volatility supported, and the vol surface is likely to be steeper than it
has been historically.

8 July 2025 13
Barclays | US Rates Research

FIGURE 24. Volatility has declined in longer tenors, and skew has FIGURE 25. Vol risk premium is higher in longer tenors
flattened

bp/y bp/y imp/22d rlzd

115 12 ratio
110 10 1.50
8 1.45
105
6 1.40
100 4 1.35
95 2 1.30
90 0 1.25
-2 1.20
85
-4 1.15
80 1.10
-6
75 1.05
-8
1M 3M 6M 1Y 2Y 3Y 5Y 10Y
70 -10
3-Apr 24-Apr 15-May 5-Jun 26-Jun expiry

3m30y vol (bp/y) ATM+/-50 vol (RHS) 1y 2y 5y 10y 30y

Source: Barclays Research Source: Barclays Research

8 July 2025 14
Barclays | US Rates Research

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