US Treasury Secretary Scott Bessent's recent bond buyback announcement, intended to curb rising long-term borrowing costs, has provided a brief respite in the market, but analysts are skeptical about its lasting effectiveness. The Treasury responded to long-bond yields hitting their highest levels since 2007 by increasing long-end buybacks to at least $4 billion per operation. While this intervention signals the administration's concern over elevated borrowing costs, which impact mortgage rates and broader credit conditions, market participants suggest the relief could be short-lived.
Several financial institutions, including JPMorgan Chase & Co., Jefferies LLC, and PGIM Inc., have warned that such unpredictable debt management moves could ultimately lead to higher borrowing costs. They argue that surprises, like the buyback boost, increase the term premium—the extra compensation investors demand for potential risks on US government debt. Michael Goosay, chief investment officer of fixed income at Principal Asset Management, noted that interventions typically don't work well in the long term, and yields tend to revert to prior levels. He also mentioned that the Treasury's borrowing needs necessitate broad curve coverage, making a significant impact from this change unlikely.
The underlying issues driving bond yields higher, such as unsustainable fiscal deficits and rising inflation expectations, are not addressed by the buyback plan. Total US debt has surpassed $40 trillion, more than doubling since 2017, due to expensive pandemic responses and ongoing tax and spending imbalances. Eric Robertsen, global head of research and chief strategist at Standard Chartered, emphasized that the increase in US Treasury yields is not due to irrational market conditions, but rather reflects fundamental supply and demand dynamics. Therefore, the intervention is seen by some as an attempt to control or interfere with natural market forces when yields reached undesirable levels.
The market reaction saw the US 30-year yield fall nine basis points overnight after the announcement but then rise again by 5.4 basis points to 5.249% on Thursday, nearing its 19-year high of 5.34%. Similarly, the US 10-year Treasury yield rose 5.3 basis points to 4.71%. While the dollar initially dropped almost 1% in its biggest one-day fall since March, it recovered slightly on Thursday. This indicates that while the immediate effect was a calming of the market, the fundamental pressures on long-term borrowing costs, stemming from global record debt accumulation and increased spending needs, persist.
