- The U.S. Treasury accepted $5.2 billion of offers in its first expanded buyback of long-term government bonds on September 10.
- The 10-year Treasury yield subsequently approached 4.98%, its highest level in almost three years.
- Investors and market participants said the operation was too small to counter the forces driving yields higher.
The U.S. Treasury, led by Scott Bessent, conducted its first expanded buyback of long-term government bonds on September 10, purchasing $5.2 billion of debt, the Financial Times reported. The operation failed to halt a bond sell-off, with the 10-year yield nearing 5% as investors questioned the buyback’s scale.
After the results were announced, the 10-year yield rose above 4.85% for the first time since 2023. It reached nearly 4.98% on September 11, its highest level in almost three years, before standing at 4.93% at the time of writing, according to TradingView.
Expanded buyback fails to calm market
Ahead of the operation, the Treasury said it was prepared to buy back as much as $6 billion of debt maturing in 10 to 20 years. That was three times the standard $2 billion operation and exceeded an August commitment to raise buybacks to at least $4 billion.
The Treasury ultimately accepted $5.2 billion of securities from more than $10 billion offered by investors. The 30-year yield also reached a multiyear high above 5.4%.
Investors said the intervention was insufficient for the roughly $32 trillion U.S. government bond market. Vincent Mortier, Amundi’s chief investment officer, said the operation’s small scale “does not solve the broader problem” of rising U.S. bond yields. He said the buyback signal could prove counterproductive because it showed “a certain nervousness” on the part of the U.S. government.
Morgan Stanley Wealth Management chief economic strategist Ellen Zentner also cited risks from the unusual interventionist approach.
“We can’t ignore the fact that there are emerging-market-type risks in some of the actions the US has been taking. We typically haven’t seen interventionist policies coming out of the US. Or when we have, it has been a formal, institutionalised process.”
Oil, inflation and borrowing weigh on bonds
A sharp rise in oil prices amid an escalation of the U.S.-Iran war and disruptions to supplies through the Strait of Hormuz added pressure to bonds. Brent crude approached $110 a barrel before paring gains to trade around $104 on September 11.
Higher energy costs increased inflation concerns and expectations that the Federal Reserve would keep interest rates elevated or raise them again. The CME FedWatch Tool put the probability of a rate increase this month at about 84.7%.
Other pressures included U.S. government debt exceeding $40 trillion, a large budget deficit, high debt-servicing costs, rising inflation expectations and substantial new borrowing. Bond issuance by technology companies to finance artificial-intelligence investment and expectations of AI-driven economic growth also weighed on the market.
Investors were additionally assessing President Donald Trump’s statements about potentially paying $5,000 to every American adult if Republicans win the midterm elections. Such a program could cost more than $1 trillion and increase concerns about future federal spending.
Investors question Bessent’s approach
Mark Cabana, Bank of America’s head of U.S. rates strategy, said the Treasury was effectively “saving” on the intervention rather than pursuing an “at any cost” approach.
“If you’re going to intervene, you should care more about moving the market in a certain direction or hitting a certain level than the price you’re willing to pay. You can’t have it both ways.”
DoubleLine portfolio manager Bill Campbell said Bessent should have acted on a larger scale.
“I would have thought Bessent would have understood that with any intervention your first shot is your best shot and you have to come in big.”
Analysts at The Kobeissi Letter said the market was effectively “fighting the US Treasury” after the increase to $6 billion failed to prevent yields from rising. The publication also said Bessent faced deficits exceeding $2 trillion, annual interest expenses of more than $1.2 trillion and oil prices that had nearly doubled since the war began.
X user Hedgie contrasted Bessent’s statement, “I am the house now,” with the continued bond selling after buybacks increased from $2 billion to $4 billion and then $6 billion. Crypto skeptic Peter Schiff said the failure to stop yields from rising could support demand for gold.
Morgan Stanley had estimated that the maximum possible buyback could be about $10 billion.
Source: Incrypted
