Translation: Peggy

Editor's Note: On August 19, the U.S. Treasury Department announced an expansion of long-term bond repurchases, increasing the one-time maximum repurchase size for 10–20 year and 20–30 year treasuries from $20 billion to at least $40 billion. Previously, the 30-year bond yield had surged to around 5.34%, reaching its highest level since 2007. After the news was announced, the long-end yield quickly retreated.

This provided the market with a clear bullish signal: the Treasury Department is actively improving long bond liquidity, possibly even forming some kind of "Treasury backstop" expectation.

However, Marcus Nunes, in "The Treasury's $4 Billion Band-Aid," presented a contrarian view: while repurchases can indeed alleviate liquidity issues, if the long bond pressure stems from a larger fiscal deficit, higher bond supply, and weaker marginal demand, then a $40 billion repurchase does not address the true contradiction.

In other words, the market needs to distinguish between two things: the Treasury can make bonds trade better, but it cannot reduce the amount the U.S. government ultimately needs to finance through repurchases.

Below is the translation of the original article:

On August 19, U.S. Treasury Secretary Scott Bessent announced that the single-trade liquidity support repurchase size for 10–20 year and 20–30 year treasuries would be increased from a maximum of $20 billion to at least $40 billion. The market reacted swiftly. The 30-year Treasury yield, which had previously surged to around 5.34%, subsequently retreated significantly, with stocks, gold, and other assets rallying simultaneously.

However, the author of this article, Nunes, believes that this reaction easily leads the market to overlook a more fundamental issue: Treasury repurchases address liquidity, not the fiscal deficit.

Repurchases can improve trading but will not reduce government financing needs

Treasury repurchases are not quantitative easing.

When the Federal Reserve conducts QE, it can create base money to purchase treasuries by expanding its balance sheet; the Treasury does not have this ability. The funds used to repurchase old debt ultimately come from government cash or new debt financing.

Therefore, Treasury repurchases are fundamentally closer to debt structure management.

It can repurchase inactive old securities to increase market liquidity and, to some extent, boost demand for specific maturity bonds, but it does not change one fact: the U.S. government still needs to finance the fiscal deficit by issuing bonds.

The scale difference is particularly evident. The U.S. Treasury previously projected a need for net borrowing of $739.0 billion in the third quarter of 2026, while the size of this long-term bond repurchase has only been increased from $20.0 billion to at least $40.0 billion.

This is also why Nunes refers to it as a "Band-Aid." While $40.0 billion is enough to improve the market trading conditions for some long bonds, it is challenging to change the supply-demand dynamics of the entire U.S. bond market.

What is really weighing on long bonds is the growing fiscal supply

In Nunes's framework, the recent rise in the 30-year U.S. bond yield to above 5% cannot be simply understood as a liquidity issue. More importantly, the amount the U.S. government still needs to finance is significant.

In July 2026, the U.S. federal fiscal deficit reached $432.0 billion, a 48% year-on-year increase, hitting a record high for the month of July; the fiscal year-to-date deficit for the first ten months is around $1.8 trillion, already surpassing the full-year level of the 2025 fiscal year.

U.S. Federal Deficit—Annual Comparison

Meanwhile, the total U.S. federal debt exceeded $40.0 trillion on August 19. With the expanding debt scale and rising funding costs over the past few years, interest expenses are also increasing.

This means that the core issue the U.S. Treasury faces is not "old bonds are illiquid," but rather: who will absorb such a huge new bond supply in the future? If investors believe that future fiscal deficits will remain high, they will demand higher yields to absorb the long-term bond supply.

From this perspective, the 30-year yield breaking 5% may not be a sign of a temporary market malfunction but a repricing of U.S. fiscal and term risks.

The buying pressure issue is not something $40.0 billion can solve

Nunes also emphasizes the change in overseas demand.

According to the U.S. Treasury's TIC data, foreign holdings of U.S. Treasury securities decreased by approximately $72.1 billion month-on-month in June, with Japan, China, and the UK all experiencing varying declines. This is not enough evidence to prove that foreign investors are "massively fleeing U.S. bonds" because monthly holdings are influenced by exchange rates, custody locations, and asset allocation changes, and TIC data itself cannot fully identify the ultimate owners of securities, but it does indicate that the previously relatively stable overseas demand should not be taken for granted.

Foreign Holdings of U.S. Treasury Securities (June 2026)

Equally important is the buyer mix. If overseas official institutions become less willing to absorb U.S. debt, the U.S. will need to rely more on private investors. Private funds typically pay more attention to price and yield, meaning the market may require higher long-term rates to attract enough funds to absorb an increasingly large supply of bonds.

This is why simply increasing buybacks cannot solve the issue. While the Treasury can buy back some old debt, it cannot dictate at what price other investors will be willing to hold a significant amount of future U.S. long-term bonds.

The Real Divide: Is This a Liquidity Problem or a Fiscal Problem?

Proponents of expanding buybacks may argue that the Treasury is not attempting to address the fiscal deficit. Buybacks were originally a market liquidity tool, and as long as they can improve old bond trading and reduce market friction, they have achieved their policy objective. In this sense, criticizing buybacks by saying “$40 billion cannot solve the deficit” may itself blur the purpose of the policy tool.

However, the real issue raised by Nunes is: if the primary driver pushing up long-end yields has shifted from liquidity to fiscal supply, then continuing to use liquidity tools may inherently have limited effectiveness.

These two explanations correspond to two completely different market assessments. If recent long bond sell-offs are mainly due to insufficient market depth, deteriorating old bond liquidity, and short-term positioning impacts, then a Treasury buyback expansion may be sufficient to stabilize the market. But if the rise in long-term yields mainly reflects a persistent fiscal deficit, larger long-term bond supply, and higher term premiums, then buybacks can only smoothen the adjustment process, making it difficult to alter the ultimate yield level.

This is also the crux of this article: while the Treasury can improve the U.S. bond market's “trading problem,” it cannot buy its way out of the U.S.'s “fiscal problem.”

What truly needs to be observed next is not how much the Treasury's next buyback will increase, but whether long-term Treasury auctions will continue to receive sufficient demand, if the fiscal deficit will narrow, and if higher yields can once again attract foreign and private buying.

If these variables do not improve, then the yield retracement brought about by $40 billion is more likely to be a short-term cushion rather than a genuine reversal of pressure on U.S. long-term bonds.

[Original Article Link]