• Treasury will at least double its long-term bond buybacks from $2 billion to $4 billion per operation between September 9 and November 4.
  • The announcement pushed the 30-year yield down by nearly 9 basis points, weakened the US dollar and supported stocks, gold and cryptocurrencies.
  • The buybacks may provide temporary market relief, but they do not resolve persistent deficits, heavy debt issuance or the rise in federal debt above $40 trillion.

The sharp selloff in long-dated Treasuries has become more than a bond-market story. Higher yields are increasing financing costs for the government, households and companies, while volatility is spreading across stocks, currencies and commodities.

The US Department of Treasury’s latest action brought short-term relief, but investors are focused on whether the impact can last as government borrowing remains elevated and inflation keeps the Federal Reserve’s policy outlook uncertain.

Treasury Doubles Buyback Sizes

The Treasury said that it will at least double the size of its buybacks, raising them from $2 billion to at least $4 billion per operation.

This process will apply to two sectors, including the 10-year to 20-year range and the 20-year to 30-year range, starting September 9 and running through November 4. ⁽¹⁾

A buyback involves Treasury repurchasing older government bonds from investors to improve market liquidity.

The Treasury said the expansion reflects strong participation in its longer-dated buyback operations, as shown by the large volume of high-quality offers it routinely receives.

Bond Yields Fall Sharply

The announcement had an immediate effect. The 30-year yield had reached 5.34% on Tuesday, its highest point since 2007. After the Treasury’s announcement, it fell to as low as 5.187%, marking the biggest one-day drop since late June. It later traded at 5.196%, down 9 basis points yesterday.

The 10-year yield also dropped, falling around 6 basis points to 4.647%. Since yields and prices move in opposite directions, the drop meant bond prices were rising. Lower yields also helped lift stocks.

The pullback in yields also weighed on the US dollar. The dollar index fell 0.75%, while the euro rose 0.79% against the dollar. Gold rallied as lower yields and a weaker dollar increased its appeal.

Bitcoin rose 5.63% and Ethereum climbed 9.23%, supported by stronger risk appetite and separate crypto-related developments.

Mixed Reactions From Analysts

Market analysts had different opinions on the move. Some said that government officials were likely concerned about how yields above 5% could damage government borrowing costs and the private sector, especially with the midterm elections coming up soon. ⁽²⁾

Others described the move as a smart tactical step that caught bond short-sellers off guard during a quiet trading period. However, they warned that the buybacks would not address the larger problem of persistent deficits and heavy government debt issuance. ⁽³⁾

Some analysts also warned that the surprise announcement broke from Treasury’s tradition of steady and predictable communication, potentially weakening confidence in future guidance. ⁽⁴⁾

Economist Mohamed El-Erian said the buyback was small relative to net issuance, the amount of new debt sold after repayments, but raised the possibility of broader efforts to control long-term yields. ⁽⁵⁾

Debt Levels Remain a Concern

Gross US federal debt has surpassed $40 trillion for the first time, more than double the $19.95 trillion recorded in January 2017. Pandemic borrowing, persistent budget deficits, tax cuts and rising spending on social programs and interest payments have all contributed to the increase. ⁽⁶⁾

The Treasury will provide at least $14 billion in additional support for longer-dated bonds, bringing maximum planned buybacks across all maturities to $83 billion. By comparison, outstanding 20- and 30-year Treasury bonds alone total around $5.5 trillion. ⁽⁷⁾

Fed Minutes Add to the Picture

The Treasury’s announcement came the same day as the release of minutes from the Federal Reserve’s July meeting. The minutes showed growing concern about inflation among policymakers.

Several officials said they were ready to raise interest rates, and many said a rate hike would likely be needed if inflation does not move back toward the Fed’s 2% target.

The Fed held rates steady last month, but Chairman Kevin Warsh gave little guidance on how the central bank might respond if price pressures continue. ⁽⁸⁾

Sources: ⁽¹⁾ US Department of Treasury, ⁽²⁾ ⁽³⁾ ⁽⁴⁾ ⁽⁵⁾ CNBC, ⁽⁶⁾ ⁽⁷⁾ Reuters, ⁽⁸⁾ Federal Reserve