US Treasury Secretary Scott Bessent has embarked on a high-stakes strategy to manage the $32 trillion Treasury market by increasing the buyback of government debt, particularly targeting the sensitive longer-duration segment. The Treasury Department announced it would more than double its buyback operations, increasing the maximum from $2 billion to at least $4 billion, specifically for 10- to 20-year and 20- to 30-year bonds. This initiative, which began on September 9 and will last until November 4, aims to provide greater liquidity to these older, less-traded securities, thereby potentially lowering long-term yields and reducing the government's borrowing costs.
The immediate impact of Bessent's announcement was a notable decline in bond yields and a surge in stock market futures. For instance, the benchmark 10-year Treasury note's yield fell by 5.7 basis points to 4.647%, and the 30-year bond's yield tumbled 9 basis points to 5.196%. This intervention followed a period of market stress where the 10-year Treasury yield had topped 4.70%, with some analysts attributing the pressure to factors like a higher term premium and increased corporate debt supply, particularly from the AI sector. The Treasury's stated purpose is to improve market liquidity by removing "off-the-run" securities, which are less traded, freeing up institutions to buy more liquid issues.
However, the long-term effectiveness and implications of this strategy are subjects of debate among financial experts. While some, like Krishna Guha of Evercore ISI, believe it could "crowd in potential buyers" and deter future short-selling, others remain skeptical. Joe Brusuelas, chief economist at RSM, and Mohamed El-Erian, economist, suggest the move, while significant for its intent, is relatively small in scale compared to overall debt issuance and could complicate the Federal Reserve's efforts to control inflation. Critics argue that by replacing long-term bonds with short-term bills, Bessent is effectively manipulating the yield curve, which could increase the government's interest expenses if the Fed raises short-term rates and potentially accelerate inflation. The move is also seen by some as a politically motivated effort ahead of an upcoming election, rather than a strategy focused on long-term price stability.
