US Treasury yields are crashing the more they try to rescue them! Bessent's buyback policy criticized as adding chaos
- Core Viewpoint: The US Treasury suddenly expanded its buyback program when long-term Treasury yields rose to their highest level in over two decades, triggering congressional questions about policy transparency, funding sources, and actual effectiveness. The market is divided on whether the Treasury is attempting to intervene in the yield curve.
- Key Elements:
- Senator Warren sent a letter to Treasury Secretary Bessent, demanding an explanation for the "unprecedented and chaotic intervention" and asking whether the expansion of buybacks is being funded by reducing the TGA balance, with a response deadline of October 21.
- On August 19, the Treasury suddenly raised the single buyback cap for 10- to 30-year Treasuries from $2 billion to $6 billion, deviating from the "regular and predictable" debt management principle.
- After the buyback expansion, long-term yields rose instead of falling, with the 10-year yield climbing to its highest since 2002 and the 30-year yield touching around 5.7%, a more than two-decade high.
- Actual buyback execution fell below the cap, with only about half of offers accepted and concentrated in a few bond types, raising market questions about the program's true purpose.
- The source of buyback funding is questionable: if it relies on issuing more short-term debt, the interest rate on new debt is higher than the coupon on old debt, so the government's interest costs may not decline; if it uses TGA cash, the government's cash buffer will shrink.
Source: Jin10
As long-term U.S. Treasury yields climb to their highest levels in more than two decades, Treasury Secretary Bessent's move to expand the Treasury buyback program is facing a fresh round of questioning from Congress.
Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, sent a letter to Bessent on Wednesday demanding that the Treasury explain a series of recent measures targeting the U.S. Treasury market. She described these operations as "unprecedented and chaotic intervention" and asked whether the Treasury plans to fund further expansion of long-term Treasury buybacks by drawing down the cash balance in the Treasury General Account (TGA).
Warren also asked Bessent to clarify whether, beyond the buyback program, the Treasury is considering other measures to lower long-term Treasury yields, and to what extent rising long-term rates have already passed through to household borrowing costs such as mortgages and auto loans. She requested that the Treasury respond by October 21.
Treasury Suddenly Expands Buybacks, Yet Treasury Yields Keep Rising
The controversy stems from the Treasury's surprise announcement on August 19 that it would expand the scale of long-term Treasury buybacks.
The decision came just two weeks after the Treasury published its quarterly financing plan. The U.S. Treasury has long emphasized that debt management should follow the principle of being "regular and predictable," so an abrupt adjustment to buyback policy outside the quarterly financing window caught some Wall Street institutions off guard.
The Treasury subsequently raised the single-operation buyback cap for certain 10-year to 30-year Treasuries from $2 billion to $6 billion. Bessent has said the expanded buybacks are mainly intended to improve the liquidity of off-the-run securities, enabling banks and other institutions to sell older, harder-to-trade debt and improving their capacity to participate in new debt auctions.
But Bessent's public remarks also led the market to believe that the Treasury simultaneously hopes to slow the rapid rise in long-term yields.
He previously described market movements as developing a "fever" and called the expansion of long-term Treasury buybacks a kind of "Treasury version of Operation Twist." When the expanded long-term bond buybacks were first executed in September, the Treasury raised the maximum purchase size to $6 billion, three times the previously planned amount.
Long-term yields did not continue to fall as a result. The U.S. 10-year Treasury yield rose again this week to its highest level since 2002, and the 30-year yield also touched a more than two-decade high near 5.7%.
In her letter, Warren said the rise in U.S. Treasury yields is largely the result of the government's own policies, and questioned the Treasury's attempt to ease long-term financing costs through debt management operations.
Treasury's Actual Purchases Fall Below the Caps
A contradiction has also emerged within the buyback program itself: although the Treasury sharply raised the purchasable amount, it has not used up the quota in actual execution.
Reuters previously reported that in recent long-term Treasury buybacks, the Treasury accepted only about half of the bonds investors offered, with each actual purchase falling below the announced maximum and purchases concentrated in a small number of securities.
This has led some investors to question the true purpose of the Treasury's expansion plan.
If the main goal is to improve market liquidity, then the Treasury has no need to accept overpriced offers just to reach the cap. Padhraic Garvey, head of Americas research at ING, believes the Treasury can perfectly well reject unattractive sell orders, and from that perspective the program is still functioning as originally intended.
Some market indicators also suggest that off-the-run liquidity has improved. The spread between long-term Treasuries and SOFR-related swaps has narrowed, which some analysts view as a sign that the buyback program is having an effect.
But if the market interprets the policy as the Treasury trying to push down long-term yields, the results so far are not ideal. Since the buyback expansion on August 19, 10-year and 30-year Treasury yields have continued to climb.
Thomas Simons, chief U.S. economist at Jefferies, believes part of the problem stems from the timing of the policy announcement. The Treasury did not wait for the normal quarterly financing meeting, but instead abruptly changed the plan during a market selloff, making it easy for investors to link the buybacks to yield control.
Where the Buyback Money Comes From Becomes a New Dispute
Another key question is how the Treasury will finance the expanded buyback program.
The market initially widely assumed that the Treasury would increase short-term T-bill issuance and use the proceeds to buy back longer-dated bonds. In practice, this would amount to reducing some long-term debt and increasing short-term financing.
But another possibility is to directly draw on cash in the Treasury General Account.
Warren specifically asked Bessent to clarify whether the Treasury is prepared to continuously lower the TGA balance to expand long-term bond buybacks. If this approach is adopted, the Treasury could purchase more long-term Treasuries without immediately increasing short-term debt issuance, but the government's cash buffer would shrink accordingly.
The Treasury has not yet made clear whether it is prepared to keep drawing on the cash account.
The buybacks themselves also involve cost trade-offs. Many of the older bonds the Treasury is currently purchasing were issued during the pandemic era under a low-rate environment with low coupons. Because current market yields are significantly higher than their coupons, these bonds are trading well below face value.
From a debt management perspective, the Treasury can buy back these older bonds at a discount; but if the funds come from newly issued short-term T-bills, the new debt carries rates notably higher than the old bonds' coupons, so the government's future interest costs may not necessarily decline as a result.
Bessent, meanwhile, has consistently attributed rising long-term yields to broader macro factors, including Middle East wars driving up energy prices and inflation, as well as investor concerns about the U.S. fiscal deficit. He believes that once the Iran conflict ends, energy prices fall, and with economic growth and fiscal consolidation, government financing costs will eventually decline.
