Treasury Secretary Scott Bessent's recent actions to expand the US bond buyback program are aimed at moderating bond yields, a move he described as quelling a "fever" in the market. The Treasury Department is expected to announce the size of upcoming buyback operations, which were initially doubled to at least $4 billion from $2 billion per operation for 10-year to 30-year securities, effective September 9 through November 4. This expansion came after the 30-year yield reached its highest level since 2007. Bessent stated his intention to push things back towards equilibrium and has not ruled out further increases, suggesting buybacks could be "more than $4 billion per issue." This mid-cycle upsizing, days after a significant rise in the 30-year yield, surprised market participants.
The initial announcement led to a temporary decrease in yields, with the 30-year yield falling 15 basis points and the 10-year yield dropping 10 basis points. However, these gains were quickly retraced as the US debt reached a record $40 trillion, raising questions about the buyback program's long-term impact. Bessent maintains that the Treasury's actions are separate from the Federal Reserve's monetary policy and would not interfere with the Fed's efforts to combat inflation or manage its balance sheet. He emphasized that the Treasury and Fed would collaborate on any balance sheet changes. Despite Bessent's reassurances, some analysts, like Krishna Guha of Evercore ISI, suggest that Bessent's efforts to manage the long end of the yield curve could complicate the Fed's objective of an unguided yield curve.
While buybacks can improve liquidity in "off-the-run" securities and potentially act as a backstop during periods of market stress, their ability to meaningfully and lastingly affect long yields is questioned. PIMCO, for instance, believes buybacks can help with market functioning and reduce borrowing costs over time, especially if the Treasury acts as a "market maker of last resort." However, the firm also notes that the Treasury cannot control broader fundamental factors driving longer-term Treasury pricing, such as large post-pandemic fiscal debt burdens, inflation uncertainty, and significant AI-related corporate issuance. The spread between Treasury yields and similar-maturity swaps, currently at 5.2% for 30-year bonds (70 basis points above the fixed-rate swap), suggests room for improvement in funding levels.
Critically, market experts like Gennadiy Goldberg of TD Securities and Michael Feroli of J.P. Morgan do not see a case for the Fed to intervene with market-stabilizing purchases unless there is severe market dysfunction. They believe the bar for Fed involvement is very high, and current conditions do not warrant it. Daleep Singh of PGIM also expressed skepticism, stating that the Treasury's actions do not fundamentally alter the factors driving higher yields and highlight the lack of a credible strategy to address the underlying issues. The concern is that if markets come to expect Treasury intervention during yield spikes, a muted response in the future could erode confidence, creating a "Treasury put" without the Fed's ability to print money.
