Treasury doubles long-dated buybacks, pushing 30-year yield down 10bps

The U.S. Treasury will at least double buybacks of 10- to 30-year Treasuries, driving the 30-year yield down nearly 10 basis points to 5.185 percent from its highest since 2007.

"This administration needs a win and maybe that comes in the form of artificially trying to keep long Treasury rates contained," said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. "They have to try something. Sentiment around the long end globally is about as bearish as I have seen in a very long time."

The announcement came just two weeks after the department released its planned buyback schedule for the quarter. The Treasury said it is "increasing, by at least double, the size of liquidity support buyback operations" for securities dated from the 10-year to the 30-year sector. The previous tentative calendar for Sept 9 through Nov 4 indicated up to US$14 billion total buybacks in that maturity range — at least doubling implies an additional US$14 billion or more. The 30-year yield had climbed almost 40 basis points since the end of June, and a 10-year auction last week drew the highest financing cost at that tenor since 2007, while a 30-year sale a day later was at the greatest yield since 2001. Traders are also preparing for a US$16 billion auction of new 20-year bonds. The dollar fell against a basket of currencies Wednesday, while U.S. stock futures gained as the buyback news eased pressure on equity valuations.

The move marks the latest in a series of interventions by Treasury Secretary Scott Bessent — who has called himself "the nation's top bond salesman" — aimed at managing down borrowing costs ahead of the November midterm elections. It also puts fresh pressure on Federal Reserve Chairman Kevin Warsh, whose failure to explain the central bank's inflation-fighting path at last month's meeting sent yields surging. The buyback expansion effectively replaces longer-dated debt with bills, a Treasury Department version of the Federal Reserve's "Operation Twist" from past decades.

US$14 Billion More in Buybacks

The Treasury reintroduced the buyback program in 2023 — an initiative originally conceived more than two decades ago when the government enjoyed budget surpluses and was repurchasing higher-cost securities. The new program was aimed in part at boosting liquidity in the market, as traders typically prefer to hold the current benchmark of given tenors, leaving older ones less easy and more expensive to trade.

The latest buyback was conducted Tuesday, when the Treasury offered US$2 billion for securities set to mature in the 2046-56 range. The operation was 10 times oversubscribed, showcasing investor enthusiasm for the program. It also comes just days after the Treasury paid out about US$85 billion in interest to bondholders, the largest sum in records kept by Bloomberg.

"If yields go too far, Treasury will try and fight it — and now we know where some pain points are," said John Briggs, head of US rates strategy at Natixis North America.

Bessent's Intervention Playbook

The buyback gambit is the latest in a series of actions by Bessent, who came to office after a decades-long hedge-fund career. At the end of last month, he engaged in the first US-Japan coordinated yen purchases since 1998, viewed by strategists as aimed at heading off large-scale sales by Tokyo of Japanese holdings of Treasuries. Days later, the Treasury's quarterly debt-issuance policy statement featured a tweak in forward guidance that opened the door to a potential reduction of sales of long-term securities.

The Treasury said in its statement that the increase "reflects Treasury's desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations."

How much of a lasting impact the move will have remains to be seen. "What really gets long rates lower is a slowing economy or resolution on the Iran conflict, and I'm not sure we're there yet," McIntyre said. The expanded buybacks begin Sept 9, with the Treasury yet to specify how the operations will be funded — though it typically relies on issuance of bills, which mature in up to a year, for fluctuating funding needs.

This article is for informational purposes only and does not constitute investment advice.