A Shift in Fed Portfolio Could Give Treasury $2 Trillion, According to Bofa

A significant shift in how the Federal Reserve manages its Treasury holdings could be on the horizon, with Bank of America (BofA) analysts suggesting the central bank might buy close to $2 trillion worth of Treasury bills over the next two years. This would effectively soak up nearly all short-term debt the Treasury plans to issue during that period.

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According to strategists Mark Cabana and Katie Craig, the Fed could realign its portfolio to better match its assets with its liabilities. This move would reduce interest-rate risk, limit negative equity, and shorten the duration of its liabilities. At the same time, it would provide the U.S. Treasury with some welcome relief, given its heavy issuance of short-term debt to cover a widening deficit and restore cash reserves after last month’s debt ceiling increase.

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Cabana explained in an interview that if the Fed reinvests mortgage paydowns into Treasury bills and rolls maturing Treasuries into bills, “that’s approximately $1 trillion.” He added, “It’s almost uncanny that Treasury plans to issue $1 trillion of bills while the Fed could be the buyer. This essentially creates a fresh source of demand at the very front end of the curve.”

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The analysis from BofA suggests the Fed might shift as much as 50% of its assets into short-term Treasury bills to align with its liabilities—mainly bank reserves and reverse repo agreements. This shift would also help absorb fluctuations in the Treasury’s cash balance.

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Their projections show T-bill supply reaching $825 billion in fiscal year 2026 and climbing to $1.067 trillion in fiscal 2027, assuming the Treasury maintains its current coupon auction sizes through October 2026. Such a move by the Fed would help ensure strong demand for short-term government debt, alleviating concerns that the flood of new issuance could strain market liquidity.

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While the Fed continues its quantitative tightening process, there are signs that discussions about its portfolio mix may soon surface in official communications. The strategists expect the topic could appear in the minutes of the July Federal Open Market Committee (FOMC) meeting, which will be released on August 20.

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Governor Christopher Waller has floated the idea of rebalancing the portfolio to achieve what he called an “optimal composition.” A recent memo from a senior Fed adviser also endorsed this approach, reinforcing the likelihood of such a shift.

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Currently, the Fed has held its benchmark interest rate steady throughout 2025 following a series of cuts in late 2024. However, income from its System Open Market Account remains negative, as the interest paid on bank reserves and other liabilities exceeds earnings from its bond portfolio—adding to the pressure for change.

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A Dallas Fed research paper evaluating three potential portfolio strategies concluded that duration matching can effectively reduce income volatility. It also found that maintaining a diversified portfolio helps limit concentration risk.

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How the Fed Could Build Its Bill Holdings

Bank of America outlines several practical ways the Fed could quickly boost its T-bill exposure:

• Reinvesting mortgage-backed securities maturities and prepayments into bills, amounting to $10 billion to $20 billion per month.
• Growing reserve balances to offset increases in non-reserve liabilities, requiring another $10 billion to $20 billion monthly.
• Rolling all maturing Treasury coupons into T-bills, which could mean $20 billion to $60 billion in purchases every month.

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Cabana and Craig expect the Fed to tweak its reinvestment strategy soon after it completes the current balance-sheet runoff, which they believe will wrap up by December 2025 at the latest.

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