US Treasury Secretary Scott Bessent's recent bond maneuvers, including an unexpected increase in bond buybacks, have triggered a significant short squeeze in the market for long-dated Treasuries. This strategy, referred to as the 'Bessent Put,' aims to lower long-term borrowing costs from multi-year highs. Just two weeks after announcing its quarterly buyback schedule, the Treasury doubled the size of its buybacks of off-the-run securities on the long end from $2 billion to at least $4 billion, a move that initially sent Treasury yields and the dollar down.
The impact of Bessent's intervention was initially short-lived, as yields quickly rebounded due to market skepticism about the Treasury's capacity to sustain such operations. However, the Treasury has hinted at using its near $1 trillion General Account (TGA) to fund these purchases, which would provide significant firepower to influence long-term bond yields. The TGA, essentially the government's checking account, currently holds about $950 billion, far exceeding the Biden administration's stated goal of $550 billion to $600 billion. The Treasury's plan to fund buybacks by potentially selling short-term bills or using the TGA has been compared to a "Treasury Twist," similar to the Federal Reserve's past operations to rejig Treasury yields.
Analysts note that Bessent's actions have targeted large short positions held by CTA trend funds, which are currently near historical extremes. Goldman Sachs estimates that a two-standard-deviation increase in bond prices could trigger a record-breaking scale of short covering, potentially pushing the 10-year yield down to around 4.3%. While some critics argue that the buybacks are insufficient to reverse the trend in yields given the massive deficit and inflation, the prospect of utilizing the TGA has added credibility to Bessent's efforts, suggesting a more aggressive attempt to manage market perceptions and reduce borrowing costs. The market is now closely watching how much of the TGA will be deployed and its long-term effect on yields.
Bessent's strategy has also generated controversy, with some accusing the Treasury of abandoning its long-standing practice of being "regular and predictable" in bond sales and of attempting to "intimidate bond shorts." The announcement of enhanced buybacks came outside the typical quarterly refunding schedule. Despite these criticisms, Treasury officials maintain that no changes have been made to official auction schedules and that the market has sufficient time to prepare before the first operation on September 9. The broader market reaction has included a weakening dollar and rallies in gold and Bitcoin, reinforcing a "debasement trade" narrative amid concerns over US economic policy and swelling deficits.
