Source: Jin10
As yields on long-term U.S. Treasuries rise to their highest levels in more than two decades, Treasury Secretary Bessent’s move to expand the Treasury buyback program is facing a fresh round of scrutiny from Congress.
Elizabeth Warren, the top Democrat on the Senate Banking Committee, wrote to Bessent on Wednesday, demanding that the Treasury Department explain a series of recent measures taken in the U.S. Treasury market. She called the operations “unprecedented and chaotic interventions” and asked whether the Treasury plans to fund a further expansion of long-term Treasury buybacks by reducing the cash balance in the Treasury General Account (TGA).
Warren also asked Bessent to explain whether, beyond the buyback program, the Treasury is considering other measures to lower long-term Treasury yields, and how much rising long-term interest rates have already fed through to household borrowing costs, such as mortgage and auto loan rates. She asked the Treasury to respond by October 21.
Treasury abruptly expands buybacks, but Treasury yields keep rising
The controversy stems from the Treasury’s surprise announcement on August 19 that it would expand the scale of its buybacks of long-term Treasuries.
The decision came just two weeks before the Treasury was due to announce its quarterly borrowing plans. The Treasury has long stressed that debt management should follow the principle of being “regular and predictable,” so some Wall Street firms were caught off guard when it suddenly adjusted its buyback policy outside the quarterly refunding window.
The Treasury subsequently raised the per-operation cap for some buybacks of 10- to 30-year Treasuries from $2 billion to $6 billion. Bessent has said the expansion was primarily intended to improve liquidity in older securities, allowing banks and other institutions to sell older bonds that are harder to trade and increasing their capacity to participate in new bond auctions.
But Bessent’s public comments also led the market to believe that the Treasury wanted to slow the rapid rise in long-term yields.
He previously described market conditions as developing into a “fever” and called the expansion of long-term Treasury buybacks a “Treasury version of Operation Twist.” When the Treasury first carried out the expanded long-term bond buyback in September, it raised the maximum purchase amount to $6 billion, three times the previous cap.
Long-term yields have not continued to fall as a result. The yield on 10-year U.S. Treasuries rose again this week to its highest level since 2002, while the 30-year yield also touched a more than two-decade high near 5.7%.
In her letter, Warren said that rising U.S. Treasury yields are largely the result of the government’s own policies and questioned the Treasury’s efforts to ease long-term borrowing costs through debt management operations.
Actual Treasury purchases fell short of the cap
The buyback program has also produced a contradiction: although the Treasury substantially increased the amount it could purchase, it has not used the full amount in practice.
Reuters previously reported that in the latest rounds of long-term Treasury buybacks, the Treasury accepted only about half of the bonds investors offered. The actual purchase amount each time was below the announced maximum, and purchases were concentrated in a small number of securities.
This has led some investors to question the Treasury’s real reason for expanding the program.
If the main goal is to improve market liquidity, the Treasury does not need to accept overpriced offers just to reach the cap. Padhraic Garvey, head of research for the Americas at ING, believes the Treasury can simply reject unattractive offers. From that perspective, the program is still operating as intended.
Some market indicators also suggest that liquidity in older securities has improved. The spread between long-term Treasuries and SOFR-linked swaps has narrowed, which some analysts view as a sign that the buyback program is having an effect.
But if the market interprets the policy as an attempt by the Treasury to push down long-term yields, the results so far have been disappointing. Since the buyback expansion on August 19, yields on 10- and 30-year Treasuries have continued to rise.
Jefferies chief U.S. economist Thomas Simons believes part of the problem stems from the timing of the policy announcement. Rather than waiting for its regular quarterly refunding announcement, the Treasury abruptly changed its plans during a market selloff, making it easy for investors to link the buybacks to efforts to control yields.
Where the money for buybacks will come from becomes a new point of contention
Another key question is how the Treasury will finance the expanded buyback program.
The market initially widely expected the Treasury to increase issuance of short-term Treasury bills and use the proceeds to buy back longer-dated bonds. In effect, this would reduce some long-term debt while increasing short-term borrowing.
Another possibility is to use cash directly from the Treasury General Account.
Warren specifically asked Bessent to explain whether the Treasury plans to keep reducing the TGA balance to expand long-term bond buybacks. This approach would allow the Treasury to purchase more long-term Treasuries without immediately increasing short-term bill issuance, but it would also reduce the government’s cash buffer.
The Treasury has not yet made clear whether it plans to continue drawing down its cash balance.
Buybacks also involve a cost trade-off. Many of the older bonds the Treasury is currently purchasing were issued during the low-interest-rate environment of the pandemic. With current market yields well above their coupon rates, these bonds are now trading at a substantial discount to face value.
From a debt management perspective, the Treasury can buy back these older bonds at a discount. But if the purchases are funded by issuing new short-term Treasury bills, whose interest rates are significantly higher than the coupon rates on the older bonds, the government’s future interest costs may not fall as a result.
Bessent, meanwhile, has consistently attributed higher long-term yields to broader macroeconomic factors, including rising energy prices and inflation driven by the war in the Middle East, as well as investor concerns about the U.S. fiscal deficit. He believes that once the conflict with Iran ends and energy prices fall, along with economic growth and fiscal consolidation, the government’s borrowing costs will eventually decline.