An examination of Treasury Term Investment interest rates

The US Treasury, through its Term Investment Option (TIO) program, lends excess cash balances to banks at interest rates determined by single-rate auctions. An important issue in TIO auctions is whether the Treasury receives a market rate of return on TIO funds. An analysis of the spread between rates on TIO auctions and rates on mortgage-backed-security (MBS) repos suggests that for small auction sizes, TIO rates are comparable to market rates, except on offerings with term lengths of fewer than five days. The study also finds that a more compressed auction schedule, in which the Treasury announces and auctions TIO funds on the same day, does not adversely affect TIO rates; thus, banks appear to be indifferent to more advance notice of auctions.