U.S. Treasury bonds are currently facing multiple pressures, including inflation exacerbated by high oil prices, rising expectations of Federal Reserve rate hikes, elevated fiscal deficits, and large-scale corporate bond issuance. Meanwhile, the $6 billion buyback volume fell short of market expectations. Bessent had previously explicitly listed lowering long-end yields as a policy objective, but on Tuesday acknowledged that the "equilibrium" price of Treasuries could not be altered. Analysts pointed out that buybacks cannot stop yield trends driven by fundamentals, remarking that "the Treasury is bringing a pea shooter to a tank battle."
U.S. Treasury Secretary Bessent's move to significantly expand the scale of Treasury buybacks has hit a wall in the market.
On Wednesday, the Treasury Department announced that it would raise the cap on single long-term Treasury buyback operations to $6 billion, tripling the originally planned scale for the previous month. However, this measure failed to curb the selling momentum in the bond market. The yield on the 10-year U.S. Treasury note touched a three-year high during intraday trading, and the decline continued after the announcement of the buyback statement.
Bessent had previously explicitly listed lowering long-end yields as a policy objective, but the current situation runs counter to this goal. Multiple pressures—including heightened inflation concerns driven by high oil prices, rising market expectations for Federal Reserve rate hikes, and elevated fiscal deficits—have combined to keep yields under persistent upward pressure.
The predicament in the bond market has directly transmitted to the real economy, with U.S. mortgage rates rising to their highest level in over a year.
"Shock effect" falls short as market demands more
The decision to expand the buyback scale stemmed from Bessent's recent public hints that the volume might exceed $4 billion, which at one point led Wall Street to expect that single-operation capacity could reach $10 billion. By comparison, the $6 billion cap disappointed the market.
"It is as if the Treasury created a monster and now has to keep feeding it," said Steven Zeng, a strategist at Deutsche Bank. He noted that the $6 billion announcement failed to deliver the "shock effect" investors had anticipated.
Elias Haddad of Brown Brothers Harriman & Co. was more direct: "For now, the Treasury has brought a pea shooter to a tank battle."
The market's call for larger buyback scales reflects the stubbornness of current long-end interest rates. Later on Wednesday, the U.S. Treasury auctioned $39 billion in 10-year notes at a yield of 4.834%, setting a record high for yields in auctions of this maturity.
Bessent acknowledged an inability to influence the "equilibrium" price of yields.
In response to the market's strong reaction, Bessent himself acknowledged at a Texas event on Tuesday that he could not alter the "equilibrium" price of Treasury bonds, stating that his objective was merely to slow the pace of price volatility and prevent harmful narratives from becoming entrenched.
He attributed the rapid rise in long-term interest rates to market panic over "U.S. insolvency," describing such concerns as "absurd, though they briefly became the dominant narrative."
In this context, Bessent characterized the expanded buyback program as a "Treasury Twist," drawing on the Federal Reserve's historical Operation Twist aimed at lowering long-term borrowing costs. He also noted that buybacks help banks unload less liquid securities, thereby freeing up capacity to participate in new debt auctions.
Krishna Guha, Head of Economics at Evercore ISI, and his team wrote in a client report that Wednesday's announcement "indicates Bessent is accepting the limited role of buyback operations," and suggested he "has likely realized that the U.S. cannot sustainably prevent fundamentals from driving yield trends."
Multiple conditions are still required to suppress yields
Wells Fargo & Co macro strategists Angelo Manolatos and Francis Brown pointed out in a research note that "additional catalysts are needed to drive down long-term yields," listing several potential conditions: a slowdown in growth and inflation, lower energy prices, reduced uncertainty regarding Federal Reserve policy, fiscal consolidation, or a contraction in corporate bond issuance.
Regarding short-term policy signals, the Treasury Department stated on Wednesday that the maximum size for each of the remaining six long-term nominal Treasury buyback operations in the current fiscal quarter would be no less than $4 billion. This wording was consistent with the initial surprise announcement on August 19 and did not send a clear signal of further expansion in scale.
A Trump administration official, citing Fox Business, stated that the Treasury Department would routinely monitor the effectiveness of buyback operations and adjust their scale as appropriate based on market conditions and liquidity needs.
Notably, while $6 billion serves as a cap rather than a fixed purchase amount, statistics show that since the buyback program resumed in 2024, the Treasury has failed to complete full purchases in only two out of 52 long-term nominal Treasury buybacks, generally preferring to buy up to the limit.
Zeng at Deutsche Bank also noted that the "final buyback announcement" released by the Treasury at 11:00 a.m. could replace the "preliminary announcement," leaving open the possibility that the actual final purchase volume might exceed the cap.
Active interventionist style sparks market controversy
The unexpected announcement of expanded buybacks on August 19, released outside the Treasury Department’s scheduled quarterly window, caught investors off guard. This has triggered external discussions about a shift in U.S. debt management toward a "more interventionist" approach, marking a stark contrast to the Treasury’s long-standing principle of "regularity and predictability."
Many investors and analysts interpret this increased buyback activity as an outward manifestation of the Trump administration’s anxiety over rising long-term borrowing costs ahead of the November congressional elections. As U.S. Treasury yields continue to climb, mortgage rates have risen to their highest level in over a year, directly impacting ordinary consumers.
In an interview with Newsmax on September 1, Bessent stated: "I am ensuring that there are no major, severe adverse consequences." However, judging by current bond market performance, this tug-of-war with the market is far from over.
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