Fed research finds dealer balance sheets expand by 21 cents for every USD 1 of Treasury coupon issuance

The Federal Reserve Board has published a staff research note finding that Treasury issuance increases pressure on primary dealers’ balance sheets and reduces spare capacity under trading desks’ internal risk limits. The estimated balance sheet expansion averages 21 cents for every USD 1 of Treasury coupon securities issued, with effects generally stronger during Federal Reserve balance sheet runoff. The balance sheet estimates draw on data for the eight largest dealers affiliated with global systemically important banks from January 2016 through June 2025. About two-thirds of the expansion reflects increased client demand for Treasury financing, with the remainder attributable to larger securities inventories. Inventory increases typically dissipate within three to five days after issuance, but additional financing remains measurable during the following week, prolonging the pressure on dealer balance sheets. An additional USD 100 billion in Treasury issuance is associated with a 2.5 percentage point increase in average use of trading desks’ value at risk limits on auction dates, after controlling for interest rate volatility. The estimated temporary exposure increases have a limited impact on the supplementary leverage ratio because exposures are averaged over a quarter and the increases are small relative to dealers’ available headroom. Treasury buybacks reduce dealer inventories and internal risk limit usage, partly offsetting issuance pressures.