Treasury Secretary Scott Bessent is expected to reveal the specifics of an expanded US bond buyback program, a move that has Wall Street dealers on edge. The announcement on Wednesday will detail the size of Thursday's operation to repurchase outstanding 10-year to 20-year securities. This follows the Treasury's August 19 surprise statement that it would "at least double" its previous $2 billion buyback sizes. The previous announcement came after 30-year yields reached their highest level since 2007, and the program is intended to address a "fever" in the bond market and push things back toward equilibrium, according to Bessent.
Bessent has refrained from specifying the exact size of the September 10 buyback, though his public comments have fueled expectations for an amount exceeding $4 billion. With 10-year yields, crucial for US mortgage rates, currently higher than last month's levels, the stakes are significant. A buyback of just $4 billion could disappoint investors and intensify selling pressure in the world's largest bond market. Conversely, a larger total, with Morgan Stanley estimating a practical cap of $10 billion, could establish a new baseline for future longer-dated buybacks, with the next scheduled in two weeks. Wrightson ICAP senior economist Lou Crandall suggested a plausible starting point of $5 billion to $6 billion.
The announcement's timing is critical, coming just hours before the Treasury's next sale of 10-year notes and a day before a 30-year bond auction. The buyback program's funding mechanism also remains unclear, though dealers anticipate the Treasury will issue more bills or potentially reduce its standing cash balance. Morgan Stanley strategists caution that funding constraints, particularly if relying on the general account, likely cap buybacks around $10 billion per operation. Wrightson estimates that increasing buybacks to $6 billion per operation would cut quarterly net issuance in the 20-year-plus sector by about 27%, while $10 billion would slash supply by roughly 55%.
Bessent's decision to expand the buyback program outside the Treasury's typical quarterly announcement schedule took investors by surprise, hinting at a more activist approach to US debt management, deviating from the department's traditional "regular and predictable" mantra. While the program initially led to a rally in longer-dated debt, rates across the yield curve have begun to rise again. Bessent has clarified that this expanded buyback is not quantitative easing (QE), stating that it aims to strengthen bond market liquidity and is a "regenerative process." He asserts that his role is to rebalance the market when there's an imbalance, not to change the equilibrium price.
Market participants will be watching for not only the size of Thursday's purchases but also any broader guidance on the program, as the August 19 statement indicated an updated tentative buyback schedule would be released later. Barclays Plc strategists Anshul Pradhan and Demi Hu suggest the Treasury might even leave the maximum size open-ended, such as "at least $4 billion per operation," to maintain flexibility. Any surprises in the buyback size or cadence are expected to be reflected more in 30-year swap spreads than in outright yields, as spreads more directly indicate supply shifts, while bond prices are influenced by broader macro factors.
