SLGS or Open-Market Treasuries for a Refunding Escrow: How Issuers Compare Them

Both paths generally put U.S. Treasury credit into the escrow, with federal agency securities the noted open-market variation, and the federal rules link the choice: Treasury Regulation §1.148-5(d)(6)(iii) treats the purchase price of an investment bought for a yield-restricted defeasance escrow as fair market value if all of its safe harbor requirements are met, and one of them, §1.148-5(d)(6)(iii)(C)(2), makes the winning bid the lowest-cost bona fide bid, including broker's fees, and no more than the cost of the most efficient all-SLGS portfolio when bids are due.

Short answer by fund type

The MSRB glossary says SLGS are most commonly used for deposit in an escrow account in connection with the issuance of refunding bonds, and 31 CFR 344.1 counts amounts held with gross proceeds in a refunding escrow, defeasance escrow, parity debt service reserve fund or commingled fund among the eligible source of funds for buying SLGS, and whether a particular fund fits one of the five categories is a conclusion for bond counsel.

The same escrow can instead hold securities bought in the market: the MSRB glossary says advance refunding proceeds are generally invested in Treasury securities or federal agency securities, though other instruments are sometimes used.

Internal Revenue Code section 149(d)(1) provides that nothing in section 103(a) or any other law exempts from federal income tax the interest on any bond issued to advance refund another bond, a repeal applying to advance refunding bonds issued after December 31, 2017 (Pub. L. 115-97 §13532(c)), with §149(d)(2) drawing the advance-refunding line at issuance more than 90 days before the refunded bond is redeemed.

Availability can decide the question on its own: Treasury may suspend SLGS sales in a debt-limit contingency, and its January 17, 2025 extraordinary-measures description notes SLGS issuance had averaged about $10 billion per month with no statute requiring Treasury to issue them.

The bidding safe harbor lets lowest cost be measured by portfolio or investment by investment, and whether a mixed escrow fits a particular issue is a structuring question for the escrow team and bond counsel.

How each works

The SEC's municipal advisor rule defines municipal escrow investments as proceeds of municipal securities and other municipal entity funds deposited in escrow to pay principal, premium, if any, and interest on one or more issues.

The SLGS path is a subscription: the issuer orders securities directly from Treasury's Bureau of the Fiscal Service, and 31 CFR 344.5(a) requires the subscription at least 5 days before issue for $10 million or less and 7 days before for more, with an issue date a business day no more than 60 days after receipt, all in calendar days, and 31 CFR 344.8(a) applies the same timing to Demand Deposits.

Before the order fills, flexibility is bounded: 31 CFR 344.5(c) permits cancellation only if the subscriber establishes to Treasury's satisfaction that it is required for reasons unrelated to using the program to create a cost-free option, a provision used to exploit interest-rate movements.

The open-market path is a procurement: GFOA describes how funding an escrow with open market securities may require an escrow bidding agent that solicits bids for the securities used in the escrow, an escrow agent, typically a commercial bank, that holds the investments, and a verification agent, typically a CPA firm, that confirms the escrow is sufficient and, where yield is limited, that escrow yield doesn't exceed the permitted yield.

GFOA notes a municipal advisor, if engaged, may be able to act as the escrow bidding agent.

Both paths run on the refunding clock: under Treasury Regulation §1.148-9(d)(2)(i)-(ii), proceeds of a refunding issue other than transferred proceeds generally get a temporary period ending 30 days after the refunding issue's issue date, while a current refunding issue gets 90 days, or at most 30 days if the refunding issue's original term is 270 days or less.

Transferred proceeds follow their own temporary period rules in §1.148-9(d)(2)(iii).

The escrow's structure and funding mechanics are covered in refunding escrow structure and funding, and the subscription screens, rate table and redemption rules for SLGS are covered in the SLGS guide.

Safety: credit, collateral, custody

On credit the two paths converge: SLGS are U.S. Treasury obligations issued in book-entry form on the Bureau of the Fiscal Service's books, and the open-market paper is the Treasury or federal agency securities the MSRB glossary describes as general for advance refundings.

Custody is where they separate: a SLGS sits on the Bureau of the Fiscal Service's books and cannot be pledged, while open-market securities are held for the escrow by an escrow agent, typically a commercial bank.

What an escrow may hold beyond Treasuries is set by the bond contract and state law: the MSRB glossary defines permitted investments as the instruments in which bond proceeds or other funds may be invested under the bond contract, and the state-law examples below show the statutory side, with bond counsel confirming the legal conclusions.

Liquidity: withdrawal flexibility

Liquidity starts with transferability: 31 CFR 344.2(d) provides that transfer of a SLGS by sale, exchange, assignment, pledge or otherwise is not permitted, 344.2(o) keeps Treasury from calling the securities before maturity, and the program's securities are non-marketable (31 CFR 344.0(a)).

The exit is early redemption: under 31 CFR 344.6, a Time Deposit note or bond can be redeemed no sooner than 30 days after issue and a certificate of 30 days or more no sooner than 25 days after issue, with Treasury receiving the request 14 to 60 days before the redemption date.

For subscriptions on or after October 28, 1996, 31 CFR 344.6(d) discounts the remaining payments of an early-redeemed Time Deposit at the current Treasury borrowing rate, which can produce a premium or a discount to the issuer.

The Demand Deposit is the program's one-day certificate, rolled over automatically each day until redemption is requested, and during a debt-limit contingency 31 CFR 344.7(b) lets Treasury move unredeemed Demand Deposits into special 90-day certificates of indebtedness earning simple interest at the daily factor in effect when issuance was suspended.

An open-market escrow runs on different paperwork: its securities are bought by dealer bid and held by an escrow agent, and the MSRB glossary describes an escrow deposit agreement that sets forth how escrow funds are invested and the schedule of debt service payments, with the verification agent confirming the escrow is sufficient and, where yield is limited, that escrow yield doesn't exceed the permitted yield.

Yield: typical spread and why

The spread is set by formula on one side and by bid on the other: 31 CFR 344.1 defines the SLGS rate as the current Treasury borrowing rate less one basis point, set at zero if that result would be negative, while open-market escrow securities are priced by dealer bids.

Treasury's 2024 final rule says the one-basis-point spread has applied since 2005, and the 2012 final rule added the zero floor because market conditions could otherwise have produced negative SLGS rates.

Treasury determines the current Treasury borrowing rate and may use proxies for maturities it does not issue, so the SLGS rate is a regulated formula rather than a published market yield.

Valuation is rule-bound on the SLGS side: Treasury Regulation §1.148-5(d)(6)(i) values a Treasury obligation bought directly from Treasury, including a SLGS, at its purchase price on the purchase date and at its redemption price on later dates.

Open-market pricing is where the enforcement history sits: the SEC has found that overcharging by dealers for open-market escrow securities in a positive-arbitrage situation diverts tax arbitrage to the dealers, a diversion known as yield burning that the SEC has called illegal in an area it has described as particularly vulnerable to abuse.

The MSRB glossary defines yield burning as the sale to an issuer of securities, typically Treasuries, at above-market prices to be held in escrow for the purpose of reducing the yield on those securities to avoid arbitrage regulations, and says the SEC and IRS view the practice as illegal.

The mechanics and the cases are covered in the guide to yield burning.

Whichever instrument an escrow holds, the yield line is tight: for investments in a refunding escrow, Treasury Regulation §1.148-2(d)(2)(ii) treats a yield that exceeds the bond yield by more than one-thousandth of 1 percentage point as materially higher.

Compliance and procurement differences

Procurement is where the two differ: SLGS are bought by subscription under 31 CFR part 344, while open-market escrow securities for a yield-restricted defeasance escrow are treated as bought at fair market value under §1.148-5(d)(6)(iii) if the purchase meets all of the safe harbor's requirements, which are a bona fide solicitation, qualifying bids, the winning-bid rules described at the top of this page, a provider certification and record retention.

Failing the safe harbor means the issuer loses its presumption; it does not by itself mean the price was not fair market value.

For a GIC the safe harbor's winning bid is the highest-yielding bona fide bid, determined net of any broker's fees, while for escrow securities lowest cost can be measured by portfolio or investment by investment.

When SLGS sales are suspended on the date an issuer agrees to buy investments, the investments bought instead are eligible for yield reduction payments under §1.148-5(c)(3)(viii), and the SLGS comparison is not required under §1.148-5(d)(6)(iii)(C)(2)(iii).

The SLGS side adds the cost-free-option prohibition of 31 CFR 344.2(f), with Treasury empowered to revoke issuance and declare a subscriber ineligible.

On the open-market side, the SEC said in Release No. 34-70462 that buying and selling escrow investments on direction without rendering advice is merely brokerage, while giving advice on those investments makes the person a municipal advisor, an interpretive reading that turns on the facts.

Suspensions are not hypothetical: Treasury's May 1, 2023 debt-limit letter to Congress announced SLGS issuance was suspended, noting SLGS count against the debt limit, and the January 17, 2025 extraordinary-measures description lists the measure again, noting SLGS are issued to assist state and local governments and that Treasury may suspend sales.

State law then redraws the escrow menu, and three statutes show the range.

• Michigan's Revised Municipal Finance Act lets refunding proceeds deposited in trust be invested in U.S. direct obligations, noncallable U.S.-guaranteed obligations, Treasury-program strips, and Resolution Funding Corporation bonds and strips (MCL 141.2607(2)); the list does not name SLGS, which are U.S. Treasury obligations, so how they fit the categories is a reading for bond counsel.
• Washington's Refunding Bond Act says refunding proceeds and other funds set aside to pay the refunded bonds may be invested only in government obligations maturing in time to make the refunding payments, a defined term reaching U.S. direct or unconditionally guaranteed obligations and bank certificates of deposit secured by them, obligations of named federal banks and agencies, public housing bonds and project notes secured by U.S. contracts, and insured institution obligations to the extent insured (RCW 39.53.060, RCW 39.53.010(4)); the section covers refunding escrows only.
• Colorado generally bars GICs from exceeding three years, allows longer terms only when they are bought with proceeds of a public entity's securities or certificates of participation or with revenues pledged to them, and says no such agreement may be purchased with proceeds held in an escrow or otherwise for the purpose of refunding bonds (C.R.S. §24-75-601.1(1)(l)(III)(A)-(B)).

Each of these is that state's rule alone, and none of it carries to another state.

Post-closing discipline reaches the escrow too: the IRS's voluntary closing agreement standards treat an escrow party's failure to reinvest matured escrow proceeds, for example a matured GIC not reinvested in Zero Percent Time Deposit SLGS, as an identified violation that a timely request resolves by paying the amount needed to reduce escrow yield to the bond yield plus interest.

The IRM section is internal IRS procedure, and resolution terms vary with the facts.

Decision table

The table condenses the comparison: the open-market path, where the bidding safe harbor is used, answers to the lowest-cost-versus-SLGS test on bid day, the SLGS path to eligibility, lead times and availability.

mGIC's order of review for proceeds is safety first, then liquidity, then yield, an ordering explained in safety, liquidity, yield.

If you are weighing the two paths for a refunding, an independent Bidding Agent can write the specifications, solicit providers and compare bids, and mGIC offers a free, no-obligation review to compare bids on your proceeds.

Final conclusions about eligibility, escrow yield and how the bidding rules apply to a specific escrow belong to bond counsel and tax counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.