The U.S. Treasury can buy back bonds, soothe a rattled market and perhaps ease political pressure before the midterms. But unless it addresses mounting debt, stubborn inflation and doubts about the Federal Reserve’s direction, the relief will be fleeting — and could come at the dollar’s expense.
Wednesday’s Treasury announcement that it would double the size of its periodic liquidity buybacks —removing older, less-traded government bonds from the market and replacing them with newer “on-the-run” issues — managed to drag 10- to 30-year Treasury borrowing rates back from the worrisome multi-decade highs of the past week.
That was mighty convenient ahead of a 20-year bond auction later that day, and politically timely because the buybacks are scheduled for the two-month window before the November 3 midterms.
Getting growing government-debt worries off the front pages in the lead-up to those polls may be enough of an administration goal in itself.
But, much like the recent currency-market intervention to support Japan’s yen, Treasury’s sleights of hand and market maneuvers may have an immediate impact, but it’s not clear they have the substance or follow-through to shift market thinking longer term.
Tactics and optics only work briefly if there’s no corresponding change to strategy, goals or underlying fundamentals, and the problem festers. True to his successful career on Wall Street, Treasury Secretary Scott Bessent can clearly read and time the market well. Whether he has a credible plan to change the increasingly dire U.S. fiscal trajectory — and finance it — is less certain.
Jefferies U.S. economist Thomas Simons said he was “taken aback” by Wednesday’s announcement and reckoned that breaking with the usual transparency around funding decisions was a dangerous game. He said the move should typically have been flagged in the quarterly refunding plans just two weeks ago.
The hurried nature of the buyback increase appeared to many to be a slightly panicky, knee-jerk reaction to an increasingly tense bond market.
“It feels very similar to the yen intervention in that it was something that seems like they just shot from the hip,” Simons said.
The U.S. Treasury joined Japanese authorities in buying yen late last month to lift the Japanese currency JPY=from 40-year lows and pushed Japan to use a Fed repurchase facility to raise the dollars it was selling rather than sell its shaky Treasury holdings.
Revealing such extreme sensitivity to the state of the Treasury market may have backfired somewhat. The yen had subsequently surrendered the gains it made after the July 31 U.S. foray before Wednesday’s action.
But the reasons investors are demanding the highest 10-year “term premium” in 12 years — the compensation for uncertainty and risk in holding Treasury debt to maturity — are varied and not going away. Buybacks don’t change debt totals; they merely reshuffle the pack.
At US$32-trillion, U.S. debt held by the public is now approaching 100 per cent of GDP. Overall debt outstanding is about to top US$40-trillion. The annual budget deficit is close to 6 per cent of GDP, and has been 5.5 per cent or above for six straight years. There’s no sign of a deficit-reduction plan of any sort in the works.
Many of the more ambitious tariff-revenue estimates have been undermined by the Supreme Court’s February ruling against the bulk of the measures, and more than US$100 billion of rebates have been paid to affected U.S. firms.
Fed reforms proposed by new Chair Kevin Warsh have also thrown the central bank’s role in debt pricing up in the air, with some investors assuming Warsh’s “task forces” will produce plans for a further US$1-trillion reduction, or more, in the Fed’s still-huge, near-US$7-trillion balance sheet of bond holdings. Other changes could bring nuanced shifts in the Fed’s inflation target and communications.
Then there’s the huge surge in U.S. corporate borrowing this year, competing for top-rated investment funds. It has been driven by an estimated US$250-billion in long-dated bond offerings from AI hyperscalers, a tally that could double next year as AI capital spending booms.
If there is a strategy at Treasury, it’s not about deficit reduction and seems to hinge on what markets call “Operation Twist” — reducing long-term debt by loading ever more of the expanding new debt into bills and short maturities, while praying the Fed eventually cuts rates to cheapen debt-servicing costs.
Long-bond buybacks fit with that, but many banks question how long Treasury can keep loading ever more new debt into paper maturing in 12 months or less. Already, some 22 per cent of the Treasury market is in bills — up 6 percentage points in less than a year and three times the share of 10 years ago.
Even though Treasury’s refunding pledge earlier this month was not to increase coupon sizes for “several quarters,” HSBC strategists think that promise may be broken as soon as May 2027. Delaying bigger coupon sales any longer may risk a more abrupt and disruptive “terming out” of the debt down the line.
What’s more, there’s the currency aspect for overseas investors. The dollar fell sharply on Wednesday in tandem with the retreat in long yields. But this may be a warning to foreign Treasury holders that their total returns will likely be capped one way or another.
“If the market price of Treasuries is not ‘allowed’ to adjust down, the foreign exchange price of Treasuries owned by foreign investors has to adjust via a weakening in the dollar,” reckons Deutsche Bank strategist George Saravelos.
Maybe reining in restive bonds through the midterms is the extent of everyone’s horizon in Washington right now. But there are another two years of this administration afterward, and it could get trickier and trickier.