Treasury Secretary Scott Bessent's initial expanded buyback operation for US government debt fell short of investor expectations, leading to a selloff that pushed borrowing costs to multiyear highs. The Treasury Department purchased $5.19 billion of debt maturing in 10 to 20 years on Thursday, which was less than the $6 billion maximum previously announced. This disappointing amount caused benchmark 10-year yields to extend their rise, reaching 4.95%, their highest level since 2023.
Investors were underwhelmed by the Treasury's move, despite the fact that the maximum buyback amount of $6 billion for debt maturing in 10 to 20 years was triple the previous maximum of $2 billion. This $6 billion maximum for the operation on Thursday was also higher than the $4 billion minimum Bessent had outlined last month as an effort to improve liquidity in long-dated debt. However, this was not enough to satisfy a market increasingly concerned about the government's ability to support longer-dated Treasuries.
Analysts noted that the reaction suggests Bessent's efforts to influence the market could inadvertently contribute to upward pressure on interest rates, contrary to what he likely intended. The 10-year Treasury note yield, a key benchmark, spiked to 4.85% before settling at 4.84% on Wednesday, with yields pushing close to highs last seen in 2023. Some strategists, like Ira Jersey of Bloomberg Intelligence, suggested that a "shock and awe" approach with larger buyback sizes, possibly $10 billion or more per operation, would be necessary to truly make an impact.
One of Bessent's predecessors, Hank Paulson, had attempted a similar strategy during the 2008 financial crisis, emphasizing the need for a "bazooka" approach to deter market speculation. However, Bessent lacks this "bazooka" as the Treasury has finite resources, funding bond purchases either by drawing down the Treasury General Account or by selling shorter-term securities. Both methods have limitations, with the latter potentially increasing short-term debt levels and eventually raising interest rates. Critics, such as Guneet Dhingra of BNP Paribas and Adam Josephson of Sakonnet Research, viewed the operations as a "Band-Aid" solution that fails to address deeper structural deficit issues, suggesting that budget deficit cuts might be more effective.
Bessent had previously stated that his August move to expand the buyback program was intended to quell a "fever" in the bond market and push things back towards equilibrium. However, the market's reaction to the latest buyback operation indicates that this goal has not yet been achieved, with some strategists, like Steven Zeng of Deutsche Bank, suggesting that the Treasury has created a situation where it now has to continuously "feed" the market with more significant actions.
