Yields on long-term U.S. government bonds have breached the 5% threshold. Bank of America has proposed an unconventional solution—a "reverse inquiry window"—suggesting the Treasury Department issue debt directly to end-investors, bypassing the traditional auction mechanism. This aims to precisely stimulate demand-side interest and curb further increases in long-end rates.
According to Zhui Feng Trading Desk, Bank of America stated in its latest report that the supply of U.S. Treasurys is substantial and expected to continue expanding, while structural demand is weakening due to concerns over fiscal discipline, persistently high inflation, and periodic sharp volatility in the bond market. The cheapness of Treasury yields relative to SOFR is evident across the entire yield curve, particularly for the 20-year and 30-year tenors.
The report suggests that, against a backdrop of narrowing conventional policy options, the "reverse inquiry window" could become a new tool for the Treasury to suppress long-end yields. If the Treasury advances this mechanism, it would support a widening of the asset swap spreads for long-term Treasury bonds. The extent of the spread widening would depend on the practical effectiveness of the window mechanism. This proposal has not yet received official endorsement from the Treasury Department, but as long-end demand remains under pressure, market attention to such innovative tools is expected to rise.
The core challenge facing the current U.S. Treasury market is the persistent expansion of supply while structural support on the demand side is eroding. Concerns regarding fiscal discipline, elevated inflation expectations, and periodic bouts of intense market volatility collectively dampen the allocation appetite of long-term investors.
From a market pricing perspective, the cheapness of Treasurys relative to SOFR is apparent across the yield curve, most notably at the long end. The yield premium of the 30-year U.S. Treasury bond over the 30-year OIS is approximately 85 basis points, reflecting the market's ongoing pricing of an imbalance between long-end supply and demand.
In this context, the market widely expects the Treasury Department to maintain the issuance sizes for coupon-bearing bonds across maturities at the upcoming May quarterly refunding announcement. As this expectation is already largely priced in, merely "staying the course" is unlikely to effectively suppress long-end yields, prompting the need for the Treasury to seek more innovative tools.
The "reverse inquiry window" is essentially a demand-driven debt issuance tool. Unlike traditional auctions where the Treasury sets the amount and the market clears via price, this mechanism allows end-investors to proactively submit their purchase requirements. The Treasury would then directly issue customized bonds based on this demand, bypassing intermediary dealers.
In terms of specific design, Bank of America outlined a preliminary framework: applicable tenors would be 10 years and above; a minimum transaction size of approximately $100 million; the Treasury could issue new CUSIP bonds with any coupon (including zero-coupon) and maturity date, priced with reference to the spline curve used in repo operations or market bid/offer quotes, plus a service fee of around 5 basis points. Eligibility would be open to direct auction participants and inquiries submitted via primary dealers.
This window mechanism would serve as a supplement to the existing "regular and predictable" (R&P) issuance framework, not a replacement. The Treasury could maintain its long-end auction sizes while using the window to meet incremental demand. If window demand proves strong, the Treasury could consider gradually reducing long-end auction sizes; if demand is weak, the program could be shut down at low cost. The report cited precedent, noting that buyback operations were initially criticized for violating R&P principles but have since become a standard tool.
Any move towards implementing a reverse inquiry window would positively support a widening of asset swap spreads for long-term Treasurys. The logic is that the window mechanism could match long-end supply more precisely with genuine demand, thereby compressing the liquidity premium associated with supply surplus.
The impact on primary dealers is likely to be relatively limited. The long-end window mechanism might reduce dealers' Treasury stripping activities, but this could instead help clear backlogs in their market-making books. The report clearly states that the core function of primary dealers as counterparties to the New York Fed would remain unchanged.
Bonds issued via the window are expected to have significantly lower liquidity compared to those from standard auctions. Bank of America anticipates initial demand would primarily come from long-term, buy-and-hold investors. Such bonds are not expected to be included in major Treasury indices due to their dispersed ownership and small size relative to the outstanding debt stock.
This concept is not entirely without historical precedent. The report references August 2013, following the "taper tantrum," when the Treasury Borrowing Advisory Committee (TBAC) dedicated a section of its quarterly report to discussing "reverse inquiry and window-driven issuance." At that time, the Treasury sought TBAC's views on how to "minimize borrowing costs, optimize the structure of the debt, enhance market liquidity, and broaden the investor base." However, the Treasury ultimately concluded that the benefits of adhering to R&P principles outweighed the costs of introducing alternative tools and did not proceed.
From a global comparative perspective, major developed market debt management offices (DMOs) currently do not employ a reverse inquiry window mechanism. Key economies like Germany, the UK, France, the Netherlands, and Canada typically rely on auctions, supplemented by syndications.
In contrast, U.S. Government-Sponsored Enterprises (GSEs) and other sovereign, supranational, and agency (SSA) issuers—including Fannie Mae and Freddie Mac—already widely use such window mechanisms. This provides a foundation, suggesting the U.S. Treasury has the potential to become a pioneer in sovereign debt management among developed markets.
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