U.S. Treasury to Increase Long-Term Bond Repurchases Starting September 9

Original author: Li Dan

Source: Wall Street Journal

U.S. Treasury Secretary Bessent said on Monday local time that the U.S. Department of the Treasury will implement its next bond buyback operation on September 9 and indicated that further operations will continue.

Bessent said the next bond buyback operation will be implemented on September 9, so let’s wait and see. He also noted that the Treasury will continue with its regular T-bill auction schedule, “so you’ll hear from us again at the start of the next quarter.”

At the time of Bessent's above remarks, the market is closely watching whether the U.S. Treasury will further expand its support for the long-term U.S. Treasury market.

Earlier Monday, U.S. media, citing senior Treasury officials, reported that the U.S. Treasury is considering tapping into its Treasury General Account (TGA), which holds nearly $1 trillion, to fund its recently expanded Treasury repurchase program. However, officials did not disclose how much funding would ultimately be used or when it would begin. Reports indicate that the current TGA balance is approximately $950 billion.

The September 9 date mentioned by Bessent is not the day the Treasury temporarily announced a new repurchase program on Monday, but rather the date on which last Wednesday’s announced enhancement of long-term Treasury repurchase measures officially took effect.

On Wednesday, August 19, the U.S. Department of the Treasury announced that it would at least double the size of liquidity support repurchase operations for nominal Treasuries with maturities of 10 to 20 years and 20 to 30 years, raising the single-operation limit from $2 billion to at least $4 billion. The Treasury explicitly stated that this adjustment will take effect on September 9 and remain in place until the end of this quarter’s refunding period, on November 4.

At the time, the Treasury explained that increasing the repurchase scale was intended to provide greater liquidity support to the long-term nominal Treasury market, as the Treasury had consistently received a large number of high-quality bids in longer-term repurchase operations, indicating strong market participant engagement in these activities.

The day after the Treasury announced the aforementioned plan, Bessenet further left room for expanding the repurchase scale last Thursday, stating that a single long-term bond repurchase operation by the Treasury could exceed $4 billion, and adding, “This is a thinly traded market segment,” and that the Treasury has “plenty of tools” in its toolkit for the U.S. Treasury market.

Bessen believes the market has not adequately focused on the underlying fundamentals of the U.S. economy, and Treasury yields do not reflect these fundamentals, particularly the “particularly scarce” liquidity of 30-year Treasuries.

Regarding the potential scale of the buyback, Bessent stated at the time that it “would depend on conditions,” and added that “any volatility within a 24-hour period is noise,” with the Treasury “trying to restore balance to a weak market.”

Therefore, September 9 marks the official commencement of the previously announced increased buyback program; and Bessent’s earlier statement about “possibly exceeding $4 billion” leaves room for the actual implementation scale to surpass the previously announced minimum level.

Earlier Monday, CNBC reported that the Treasury is considering using the TGA, which stands at nearly $950 billion, to fund its recently expanded bond buyback program. Two senior Treasury officials said the TGA is viewed as a potential source of funds for purchasing certain non-benchmark treasuries, though no specific amount or timing has been determined.

This news is particularly noteworthy because the market had largely assumed that the Treasury would fund the buybacks by issuing more short-term Treasury bills to finance the repurchase of long-term government bonds.

If the Treasury adopts this approach, it would mean increasing the supply of short-term debt while reducing the supply of long-term bonds, creating an effect similar to a fiscal version of "Operation Twist" (QT). Markets have previously discussed the similarities between Treasury operations and the Federal Reserve's historical "Operation Twist."

If the Treasury directly uses TGA cash to conduct repurchases, it means it does not need to rely entirely on issuing new short-term Treasuries to fund the buybacks.

However, TGA approaching $1 trillion does not mean the Treasury plans to deploy nearly $1 trillion to buy U.S. Treasuries. Current reports only indicate that TGA is viewed as a potential source of funds; the Treasury has not yet disclosed the actual amount it intends to use.

More importantly, the TGA is the U.S. Treasury’s primary operating account at the Federal Reserve, used for the government’s daily receipts and disbursements. The actual funds available to the Treasury for repurchases are also constrained by factors such as government spending, debt issuance schedules, and cash balance management targets.

Therefore, what truly matters for the market is not the absolute balance of the TGA, but whether the Treasury will utilize these funds, how much it will use, and at what pace it will conduct long-term Treasury buybacks.

The immediate context for the Ministry of Finance's sudden expansion of long-term bond repurchases is that U.S. long-term Treasury yields had been persistently high.

After the announcement on August 19, U.S. Treasury yields briefly declined significantly, with the market viewing it as an important policy signal that the Treasury is attempting to alleviate funding pressure at the long end.

But this positive effect did not last long.

Last Thursday and Friday, U.S. intermediate- and long-term Treasury prices fell for two consecutive days, indicating that the boost from the Treasury’s expanded repurchase operations lasted only one day. The market has refocused its attention on the U.S. government’s large fiscal deficit, long-term debt supply, and inflationary pressures.

Last week, media reports noted that as U.S. Treasury prices declined, investors believed the new measures by the U.S. Treasury might only temporarily curb rising borrowing costs, with market movements highlighting skepticism about the effectiveness of the new measures. Howard Du, a strategist at TD Securities in New York, said the market is “not fully convinced” that Bassett can truly suppress long-term yields.

This also means that after the buyback is officially intensified on September 9, market focus will shift from “whether the Treasury will act” to “whether the action can truly alter the long-term supply and demand of U.S. Treasuries.”

According to the current plan announced by the Treasury, starting September 9, the maximum size for each repurchase of 10- to 20-year and 20- to 30-year Treasuries will be increased to at least $4 billion. The Treasury has also previously stated that it will provide further details on future repurchase sizes at its next quarterly refunding meeting on November 4.

Therefore, September 9 will be a key date for the market to test the actual impact of the Treasury’s expanded repurchase program, while Monday’s news regarding the TGA further expanded market speculation about the scale of the Treasury’s future “ammunition.”

But whether the TGA cash or the issuance of short-term Treasury bills is ultimately used to fund repurchases, this operation cannot be simply equated with the Federal Reserve’s quantitative easing. The Treasury can alter the maturity structure of debt and the marginal demand for specific Treasury securities, but the overall U.S. fiscal deficit, debt level, and future financing needs will not disappear as a result.

For long-term U.S. Treasuries, the true determinants of the yield center will remain the U.S. fiscal position, inflation, economic growth, and investors’ assessments of future Treasury supply.