Here's the problem in a nutshell: the Treasury has a $2.7 trillion funding need (to pay for all those bailouts) this quarter, and while it has seen its issuance of Bills and CMBs explode to over $1 trillion in April, it can't rely forever on short-term debt which has to be rolled every few weeks. On the other hand, pushing up coupon auction sizes could destabilize the market (as we saw moments ago with the refunding announcement which sent yields sharply higher after the Treasury announce a record refunding amount). So how does the Treasury bridge this chasm between soaring, and unsustainable Bill issuance into a regular coupon schedule?

That was the task facing the Treasury Borrowing Advisory Committee, or TBAC, in the past few days, which described a "perfect storm" with respect to market functioning as COVID-19 spread around the world, and which writes in its Minutes published momentsago that "the current challenge for Treasury is to increase issuance to finance the policy response while avoiding a decline in market functioning.  The Committee noted that, while interest rates have reached historic lows, there are inherent risks based on the expected Treasury supply in the coming months."

So how did the smartest bond dealers on Wall Street propose the Treasury resolve this challenge? Read below for the key highlights from the TBAC Minutes (courtesy of BBG):

• Committee reviewed a presentation of the evolution of liquidity conditions in financial markets during the COVID-19 outbreak, with the presenting member describing a "perfect storm" in regards to market functioning

• Presenting member highlighted how liquidity pressures were exacerbated by the large demand for cash and cash-like instruments and reviewed potential sources of Treasury demand in the context of dealer balance sheet constraints

• Member concluded that the current challenge for Treasury is to increase issuance to finance the policy response while avoiding a decline in market functioning

• Committee noted that, “while interest rates have reached historic lows, there are inherent risks based on the expected Treasury supply in the coming months"

• TBAC recommended Treasury continue to term out the historic increase in bill issuance through gradual increases in issuance of nominal coupon securities across maturities and security types

• Some members favored increasing issuance of long- term securities in light of the large increase in financing needs, the importance of managing rollovers, and the historically low level of interest rates

• Others noted recent liquidity conditions in 30-year bonds as a potential challenge for growing issuance in that sector quickly

• Fred Pietrangeli, director of the office of debt management, said one factor increasing the estimate of net privately-held marketable borrowing is the increase in the size of the expected cash balance to $800B for the end of June and September

• Desire to run a higher cash balance over the next few quarters reflects prudent risk management, given the larger size and greater uncertainty of outflows from the Treasury General Account

• Pietrangeli also noted Treasury has already increased financing significantly, with nearly $1.5t in net issuance completed so far in 3Q FY2020 through a substantial increase in bill issuance

• Despite the large increases in bill issuance, auctions have “gone smoothly, investor demand for bills remains strong, and bid-to-cover ratios have been stable”

• Nick Steele, deputy director of the Office of Debt Management, noted that dealers widely expected a “gradual tapering of purchases on a glide path to a stable quantitative easing style program as long as the COVID-19 outbreak persists”

• Most dealers noted the potential for a return to a very high level of purchases in response to another significant market disruption

• Dealers were divided on whether the Fed would eventually concentrate purchases in longer-maturity Treasury securities to ease financial conditions or would again mimic the amount of Treasury securities outstanding “to be more market neutral”

The TBAC's left off with the following questions for consideration:

The full minutes can be read here (link) while the full TBAC presentation is below: