James Khanduja, Morgan Stanley's head of US rates strategy, has cut his overweight positions in longer-dated US Treasuries following Treasury Secretary Scott Bessent's announcement to significantly increase bond buybacks. Khanduja cited the unexpected nature of the intervention and the risk of price distortions as reasons for his decision, noting the potential for the Treasury's actions to influence market behavior in ways that aren't fundamentally driven.
Bessent's plan involves at least doubling buyback operations for securities with maturities ranging from 10 to 30 years, an initiative aimed at taming rising long-term borrowing costs. This move, announced just two weeks after the Treasury's quarterly refunding schedule, has drawn skepticism from various market participants and experts, including Stanley Druckenmiller, Bessent's former mentor. Druckenmiller argued that such interventions only delay the necessary fiscal adjustments and create an artificial market.
The market's reaction has been mixed. While long-dated Treasuries initially rallied, yields quickly rebounded as doubts emerged about the efficacy of the $4 billion-plus buyback program against the backdrop of a $40 trillion national debt and projected $2 trillion budget deficit for 2026. The 10-year US yield remains near 4.7%, and the 30-year yield is close to 5.2%, still at multi-year highs.
Khanduja's move reflects a broader concern among some analysts that the Treasury's intervention, while providing a temporary "put" or backstop, doesn't address the underlying fiscal challenges driving higher yields. Critics, including those at Pimco, suggest that without tackling structural budget deficits, the impact of buybacks will be limited, and the market will continue to price in the significant supply of new debt required to finance government spending.
