U.S. Treasury Secretary Bessent is facing a new round of questions from Congress after expanding Treasury buybacks at a time when long-dated U.S. government bond yields have risen to their highest levels in more than two decades.
Elizabeth Warren, the top Democrat on the Senate Banking Committee, sent Bessent a letter on Wednesday asking the Treasury Department to explain a series of recent steps taken in the Treasury market. She called the moves an "unprecedented and chaotic intervention" and asked whether Treasury plans to fund further long-bond buybacks by lowering the cash balance in the Treasury General Account, or TGA.
Warren also asked Bessent to explain whether, beyond the buyback program, Treasury is considering other measures to lower long-term Treasury yields, and to what extent higher long-term rates have already passed through to household borrowing costs such as mortgages and auto loans. She asked the department to respond by Oct. 21.
Treasury expanded buybacks, but yields kept rising
The dispute traces back to Aug. 19, when the Treasury Department unexpectedly announced a larger long-dated buyback program.
The decision came just two weeks after Treasury released its quarterly financing plan. The department has long said debt management should follow a "regular and predictable" approach, so changing the buyback program outside the quarterly financing window caught some Wall Street firms off guard.
Treasury later raised the cap on some individual buybacks for 10-year to 30-year bonds from $2 billion to $6 billion. Bessent said the larger program was mainly intended to improve liquidity in older issues, allowing banks and other institutions to sell off-the-run bonds that are harder to trade and freeing up capacity to participate in new auctions.
At the same time, Bessent's public remarks led markets to think Treasury also wanted to slow the rapid rise in long-term yields.
He had described the market move as a developing "high fever" and referred to the expanded long-bond buybacks as a kind of "Treasury version of Operation Twist." When Treasury carried out the first enlarged long-bond buyback in September, it lifted the maximum purchase size to $6 billion, three times the previous plan.
Long-term yields did not keep falling after that. The yield on the 10-year U.S. Treasury note climbed again this week to its highest level since 2002, while the 30-year yield touched a more than 20-year high near 5.7%.
In her letter, Warren said the rise in Treasury yields was to a large extent caused by the government's own policies, and she questioned Treasury's attempt to use debt-management operations to ease long-term financing costs.
Actual purchases came in below the announced caps
The buyback program has also produced a contradiction. Treasury sharply increased the amount it could buy, but in practice it did not use the full capacity.
Reuters previously reported that in several recent long-bond buybacks, Treasury accepted only about half of the bonds offered by investors. The actual purchase size in each operation was below the published maximum, and the buying was concentrated in a limited number of issues.
That has led some investors to question the real purpose of the expanded program.
If the main goal is to improve market liquidity, Treasury has no reason to accept overpriced offers just to hit the cap. Padhraic Garvey, head of research for the Americas at ING, said Treasury can simply reject uneconomic offers, and from that perspective the program is still functioning as originally intended.
Some market indicators also suggest liquidity in older issues has improved. The spread between long-dated Treasuries and SOFR-linked swaps has narrowed, which some analysts see as a sign that the buyback program is having an effect.
But if the market reads the policy as an effort by Treasury to push down long-term yields, the outcome so far has been poor. Since the Aug. 19 expansion, yields on both 10-year and 30-year Treasuries have continued to move higher.
Thomas Simons, chief U.S. economist at Jefferies, said part of the problem lies in the timing of the announcement. Treasury did not wait for its regular quarterly financing meeting and instead changed the plan during a market selloff, making it easy for investors to connect the buybacks with yield control.
How Treasury would pay for the program is now a central issue
Another key question is how Treasury would finance the larger buyback program.
Markets initially assumed Treasury would issue more short-term Treasury bills and use those proceeds to repurchase longer-dated bonds. In effect, that would mean reducing some long-term debt while increasing short-term funding.
But another possibility is that Treasury could draw directly on cash held in the Treasury General Account.
Warren specifically asked Bessent to clarify whether Treasury is prepared to keep lowering the TGA balance to expand long-bond buybacks. If Treasury takes that route, it could buy more long-term bonds without immediately increasing bill issuance, but the government's cash buffer would shrink as a result.
So far, Treasury has not made clear whether it is prepared to keep using the cash account in that way.
Cost trade-offs remain part of the debate
The buybacks also involve a cost trade-off. Many of the older bonds Treasury is buying were issued during the pandemic-era low-rate environment. Because current market yields are far above their coupons, those bonds are now trading well below par.
From a debt-management standpoint, Treasury can repurchase those older bonds at a discount. But if the money comes from newly issued short-term bills, and those bills carry rates well above the coupons on the old bonds, the government's future interest costs may not actually fall.
Bessent has continued to attribute higher long-term yields to broader macro factors, including the effect of the war in the Middle East on energy prices and inflation, as well as investor concern over the U.S. fiscal deficit. He has said that once the Iran conflict ends, energy prices retreat, and economic growth and fiscal consolidation take hold, government borrowing costs will eventually decline.