U.S. Treasury Secretary Bessent is facing a new round of questions from Congress after the Treasury expanded its buyback program for long-dated government bonds even as long-term yields continued to rise.
Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, wrote to Bessent on Wednesday asking the department to explain a recent set of actions in the Treasury market. She called them 「unprecedented and chaotic interventions」 and asked whether the Treasury plans to fund additional long-bond buybacks by reducing the cash balance in the Treasury General Account, or TGA.
Warren also asked Bessent to say whether the Treasury is considering any other measures, beyond the buyback program, to lower long-term Treasury yields, and how much the rise in long-term rates has already passed through to household borrowing costs such as mortgages and auto loans. She asked for a response by Oct. 21.
Buybacks expanded, but yields kept moving higher
The dispute traces back to the Treasury’s Aug. 19 announcement that it would expand long-dated Treasury buybacks.
The move came only two weeks after the department released its quarterly financing plan. The Treasury has long said debt management should follow a “regular and predictable” approach, so changing buyback policy outside the quarterly refunding window caught some Wall Street firms off guard.
The Treasury then raised the single-operation cap on some 10-year to 30-year bond buybacks from $2 billion to $6 billion. Bessent said at the time that the larger program was meant to improve liquidity in older issues, allowing banks and other institutions to sell off-the-run bonds that are harder to trade and freeing capacity to participate in new auctions.
Still, Bessent’s public comments also gave markets reason to think the department wanted to slow the sharp rise in long-term yields. He described market conditions as developing a “high fever” and referred to the expanded long-bond buybacks as a “Treasury version of Operation Twist.” When the Treasury carried out its first enlarged long-bond buyback in September, the maximum purchase size was raised to $6 billion, triple the earlier plan.
That did not produce a lasting decline in yields. The yield on the 10-year Treasury rose again this week to its highest level since 2002, while the 30-year yield touched a level near 5.7%, also around a more than two-decade high.
In her letter, Warren said the rise in Treasury yields was to a large extent the result of the government’s own policies. She also questioned whether the Treasury should be using debt-management operations to try to ease long-term financing costs.
Higher caps, but actual purchases stayed below them
The buyback program has also exposed a contradiction. Even after sharply lifting the amount it could buy, the Treasury did not use the full capacity in actual operations.
Reuters previously reported that in recent long-dated Treasury buybacks, the department accepted only about half of the bonds offered by investors. Actual purchase sizes came in below the announced maximum each time, and the buying was concentrated in a small number of issues.
That has led some investors to question what the expanded program is really meant to do.
If the main objective is to improve market liquidity, the Treasury has little reason to hit the cap by accepting offers at prices that are too expensive. Padhraic Garvey, head of research for the Americas at ING, said the Treasury can simply reject uneconomic offers, and viewed the program through that lens as still operating in line with its original function.
Some market indicators also suggest liquidity in older issues has improved. Spreads between long-dated Treasuries and SOFR-linked swaps have narrowed, which some analysts see as a sign that the buyback program is having an effect.
But if markets interpret the policy as an effort by the Treasury to push long-term yields lower, the results so far look weak. Since the Aug. 19 expansion, yields on both 10-year and 30-year Treasuries have continued to climb.
Thomas Simons, chief U.S. economist at Jefferies, said part of the problem lies in the timing of the announcement. Instead of waiting for the normal quarterly refunding meeting, the Treasury changed course in the middle of a market selloff, making it easy for investors to link the buybacks with yield control.
Funding source becomes the next flashpoint
Another central question is how the Treasury would pay for a larger buyback program.
The market initially assumed the department would issue more short-term Treasury bills and use those proceeds to repurchase longer-dated bonds. In effect, that would mean reducing part of its long-term debt and relying more on short-term funding.
Another option is to use cash directly from the Treasury General Account.
That is why Warren specifically asked whether the Treasury is prepared to keep lowering the TGA balance to expand long-bond buybacks. Under that approach, the department could buy more long-dated Treasuries without immediately increasing bill issuance, but the government’s cash buffer would shrink at the same time.
So far, the Treasury has not made clear whether it is prepared to keep using the cash account in that way.
Buying old bonds at a discount does not automatically cut costs
The buybacks also come with a cost trade-off. Many of the older bonds the Treasury is now buying were issued during the pandemic-era low-rate period and carry low coupons. Because market yields are now much higher than those coupons, the bonds trade well below par.
From a debt-management standpoint, the Treasury can repurchase those bonds at a discount. But if the money comes from newly issued short-term bills, and the rates on those bills are well above the coupons on the old bonds, the government’s future interest costs may not actually fall.
Bessent has continued to attribute the rise in long-term yields to broader macro factors, including war in the Middle East pushing up energy prices and inflation, as well as investor concern about the U.S. fiscal deficit. He has said that once the conflict involving Iran ends, energy prices retreat, and economic growth and fiscal consolidation take hold, the government’s financing costs will eventually decline.