The U.S. Treasury Department said Wednesday that it plans to buy $6 billion of government debt this week as part of an effort to reduce long-term borrowing costs and maintain liquidity in the bond market. The buyback operation, which triples the normal level of $2 billion per week, will continue at a higher level moving forward, Treasury said, with at least $4 billion in debt purchased each week for the next few months, and perhaps longer.
This week’s buyback, which is scheduled for Thursday, will focus on 10- and 20-year Treasury bonds. Yields have been rising on those bonds, along with other durations, as investors confront the reality of persistent inflation, massive investment in artificial intelligence and rising government debt levels around the world.
Treasury Secretary Bessent said Tuesday that the buyback operation is intended to reduce the “fever that was building” in the bond markets.
The markets did not respond as hoped. Treasury yields rose after the announcement Wednesday, with the yield on long-duration bonds rising as much as 5 basis points in volatile trading, though yields fell back in later trading.
“It doesn’t seem like the patient’s feeling much better,” Adam Josephson of Sakonnet Research wrote in a note, per Investopedia.
Later in the day, an auction of 10-year U.S. Treasury notes was met with solid demand, providing some measure of relief, though Treasury bond yields remained higher across the board.
A matter of size: Investors have largely dismissed Bessent’s efforts to tame the bond market, seeing his buybacks as too small to make a meaningful difference.
Robert Tipp, chief investment strategist and head of global bonds at PGIM Credit, told CNBC that the announced buyback level was at the bottom of the range investors were hoping to see, with expectations running as high as $10 billion. “At the end of the day, the Treasury is issuing a spectacular amount of securities, and they’re trying to control the price level at the back end of the curve with really what, in the big scheme of things, is not necessarily a major operation,” he told CNBC.
Comparing Bessent’s effort to that of the Treasury secretary who wrestled with the market turmoil of 2008, bond fund manager Mark Spindel of Potomac River Capital told CNBC that, “Hank Paulson’s bazooka this is not.”
Still, Bessent seems confident that he has the firepower to bend the market to his will. Defending recent interventions he made to support the Japanese yen, Bessent compared himself to the owner at a casino. “Whenever people say, oh well, Treasury secretary is taking a risk, it’s my dream,” he said. “I have asymmetric information. I am the house now. ... You can bet against me if you want.”
Many investors are skeptical, though. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said the size issue has been a problem before. “The only way in which an intervention can cap interest rates is if it’s so absurdly large as to dominate other factors,” he said, per Politico. “The history of interventions is littered with the detritus of policymakers.”
Stanley Druckenmiller, an investing legend who once served as a mentor to Bessent, warned the Treasury secretary in an opinion piece he wrote for The Wall Street Journal in August that his effort faces a very difficult road ahead. “Once markets believe Treasury is defending a price, every rise in yields becomes a test of official resolve, and the operations must grow to survive the tests,” Druckenmiller wrote. “Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding.”