The US Treasury made an unexpected announcement on Wednesday, declaring it would at least double the scale of its long-dated Treasury buyback operations. This move sent ripples through financial markets and revived memories of the Federal Reserve's so-called "Operation Twist" among participants. This article breaks down the details of the new policy, funding channels, the authorities' true intentions, potential effects and impacts, as well as response strategies.
How the expanded buyback will work
The expanded buyback operations will commence on September 9 and continue through the remainder of the current quarterly refunding cycle until November 4. The program covers 10-to-20-year and 20-to-30-year Treasuries, with the maximum size of each operation increasing from the current $2 billion to at least $4 billion. Further details on future buyback scale will be announced at the next quarterly refunding meeting on November 4. According to the Treasury's tentative schedule from September 9 to November 4, total buybacks of 10-to-30-year Treasuries would reach at most $14 billion; if at least doubled, this implies an increase of at least $28 billion in buyback scale. Barclays strategists estimate that the increased buyback scale equates to roughly an additional $16 billion in Treasury purchases per quarter, or approximately $64 billion annually, representing about 15% of the current annual issuance of 20-year and 30-year bonds.
Funding channels
The Treasury has not yet specified how it will finance the expanded buybacks, though it typically relies on bills with maturities of one year or less to meet fluctuations in funding needs. If it indeed increases short-dated issuance to replace long-dated bonds, this move would resemble a Treasury-version of "Operation Twist." The Treasury has been heavily dependent on short-dated issuance to finance growing debt, with current monthly bill auctions totaling nearly $2.25 trillion, supported by strong investor demand and relatively stable coupon bond issuance volumes. Compared to overall issuance scale, the additional funds needed for expanded buybacks remain small.
History of buybacks
The Treasury restarted its buyback program in 2023, with one of the new program's goals being to improve market liquidity, as traders typically prefer holding the most recently issued benchmark bonds of specific maturities, leaving older issues relatively inactive and costlier to trade. The mechanism was first conceived more than two decades ago when the US government ran budget surpluses and would repurchase and retire higher-cost bonds. A similar approach was used in 1961 when the Kennedy administration sought to support a weak economy by lowering long-term borrowing costs without reducing short-term rates. The latest buyback occurred on Tuesday, with the Treasury proposing to repurchase $2 billion of bonds maturing between 2046 and 2056; investor sell offers reached ten times the buyback amount, underscoring strong enthusiasm for the program.
True intentions
The Treasury's stated rationale is to provide "greater liquidity support." However, Wall Street believes the thinking behind this move is more straightforward: Bessent has repeatedly said he possesses a "vast toolbox" to keep yields in check and achieve the Trump administration's stated goals, and the Treasury now aims to showcase that. A Citigroup team led by Jason Williams said, "In our view, this is about controlling the long-end yield, not about maintaining proper market functioning." Some analysts believe the move aims to proactively lower financing costs ahead of the November midterm elections. Bessent mentioned this buyback program last year, and since taking office he has repeatedly indicated that the 10-year yield is a benchmark financial indicator he watches closely. He has also recently undertaken a series of intervention measures: late last month he participated in the first coordinated US-Japan yen-buying intervention since 1998; days later, the Treasury adjusted its forward guidance in the quarterly bond issuance policy statement, paving the way for potential future reductions in long-dated Treasury issuance. Bessent has also frequently defended the new communication strategy of Fed Chair Kevin Warsh through media and social platforms.
Market reaction
The Treasury yield curve twisted and flattened sharply on Wednesday, with long-dated bonds outperforming. Just after 3 PM New York time, short-dated yields rose about 1 basis point while 20-year and 30-year yields fell approximately 9 basis points. The 2s10s spread and 5s30s spread narrowed by 6 basis points and nearly 8 basis points intraday, respectively. The dollar posted its biggest three-week decline, falling to its lowest level since mid-May. USD/JPY dropped nearly 1% to 158.05. The yuan rode the momentum to a three-and-a-half-year high. Gold prices surged, with spot gold up 4.1% to $4,510.75 per ounce. Silver spot rose 4.7% to $66.3556 per ounce, with platinum and palladium also advancing. Gold ETFs tracked by Bloomberg added more than 257,000 ounces on Tuesday, the largest single-day inflow since April. The S&P 500 rebounded, though market moves were choppy as Fed meeting minutes showed several officials favored rate hikes last month.
Analysis and commentary
Padhraic Garvey, regional head of research at ING Group in New York: "On the surface, increasing long-dated bond buyback scale is about enhancing liquidity. But if that were truly the case, it could have been announced in the routine quarterly statement two weeks ago. Acting now suggests something else is at play — calming sentiment at a time when long-end yields face substantial upward pressure. It will alleviate pressure, but it won't absorb it."
Barclays strategists led by Anshul Pradhan, in a note titled "The Treasury is watching": "We believe today's announcement to expand long-dated buybacks is effectively reducing supply at the long end. Such announcements typically come at refunding meetings rather than between meetings, suggesting the recent rise in yields has indeed caught the Treasury's attention... Signaling matters. Investors now know the Treasury is prepared to adjust flexibly if long-end yields rise... If the bond rally reverses, the Treasury can readily expand buyback scale further. The announcement says 'at least $4 billion per operation.'"
Bloomberg Intelligence strategists Will Hoffman and Ira Jersey: "The timing of the announcement is surprising and likely carefully chosen. The Treasury chose to announce outside the quarterly refunding cycle, during a quiet summer week with no major economic data releases and potentially thin liquidity — precisely to amplify the market reaction. What the new language of 'at least $4 billion per operation' actually means in practice remains to be seen. But this marks the first time this administration has deployed a significant issuance adjustment tool, opening the door to future creativity."
BNP Paribas' rates strategy team led by Guneet Dhingra: "We believe this is a response to long-end yields rising to pre-global financial crisis highs, especially with the Fed still on hold... Despite a series of measures to deter bond vigilantes, we believe these measures will struggle to offset the decline in Fed credibility or rising rate-hike expectations... We maintain our short duration positions."
Deutsche Bank's global head of FX strategy, George Saravelos: "We believe that whether it's buybacks or encouraging the use of the FIMA facility for reserve management, these constitute a form of soft financial repression aimed at containing the long end of the US yield curve... We view both measures as negative for the dollar. If Treasury prices are 'not allowed' to fall, then the FX price of foreign investors' Treasury holdings can only adjust through dollar depreciation... Overall, markets may increasingly focus on further measures aimed at supporting the Treasury market. The more they are seen as distorting market pricing, the more the dollar may fall."
Wells Fargo economists Tom Porcelli and Michael Pugliese: "Given the unsustainability of fiscal policy, the Treasury's decision to at least double long-dated buybacks will require increased short-dated issuance to fund them — effectively a 'big bet' on lower short-end rates."
Trading strategies
Citigroup believes the latest move could lead to short-term dollar weakness and advises clients to use the dollar as a funding currency for bets on high-yielding emerging market currencies, which "should perform well in the current environment." The bank previously favored the Canadian dollar and Swiss franc as funding currencies. It sees upside for gold and has abandoned its underweight duration stance, citing greater constraints at the long end of the yield curve and expectations that the Fed will not hike at its next two meetings. The bank advises clients to buy long-dated Treasuries, forecasting the 20-year yield to decline from its current level of around 5.2% to 4.9%.
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