Edgy bond investors unconsoled by Bessent's big buyback

Speaking a day after the buyback announcement, Treasury Secretary Scott Bessent told conservative strategist Steve Bannon on Thursday that his job is to keep markets orderly as the economy copes with the Middle East conflict. "I frequently say, and no one seems to listen, I can't change the equilibrium price," Bessent said. "I am just trying to slow things down, make people step back and look." Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania, said investors may have been unnerved by the Treasury's "pro-activeness" in attempting to lower long-dated bond yields, a sign that strains in the Treasury market may be more severe than investors had assumed. U.S. debt recently surpassed $40 trillion and monthly fiscal deficits have recently dwarfed federal revenue. "The market is probably thinking that with the Treasury looking at this and trying to keep a ceiling on yields, that it's a bigger problem than what we think it is in terms of the deficits and outstanding debt," he said. "The $6 billion is not a big amount — it's more the fact they're actively doing it." The disappointment also reflects changing expectations around Treasury buybacks. Initially viewed as a tool to improve market liquidity, buybacks are increasingly seen by investors as a potential measure to ease supply pressures in longer-dated maturities. But the larger buyback announcement failed to convince many investors that it would materially improve the supply-demand balance in longer-dated bonds. For now, the market's response suggests that Treasury faces a high bar to contain yields. A buyback three times larger than its previous operation was not enough to reverse the recent bond selloff, leaving investors to focus on whether Treasury is willing to scale up purchases further as long-term yields rise, or undertake more market-supportive action. At the end of the day, market participants believe buybacks are a temporary solution to long-term problems. "Treasury buybacks are unlikely to materially alter the diverse forces raising yields, including widening federal deficits, sticky inflation and increased global bond issuance," said Tony Miano, investment strategy analyst at Wells Fargo Investment Institute. Investors were neither shocked nor awed by the U.S. Treasury's decision to triple the size of its long-dated bond repurchase, keeping bond yields elevated and signaling that persistent unease over the government's mounting debt remains firmly in place. Treasury said on Wednesday it would buy as much as $6 billion of debt maturing in 10 to 20 years in its next buyback operation, up from a $2 billion maximum previously. The amount was higher than the $4 billion minimum Treasury Secretary Scott Bessent outlined last month as part of an effort to improve liquidity in long-dated debt. That buyback was undertaken on Thursday, with Treasury buying back $5.187 billion in 10-year notes and 20-year bonds. But that was not enough to satisfy a market that has become increasingly concerned about the government's capacity to support longer-dated Treasuries at a time when a generally stable economy and expanding deficits are pushing yields up. The benchmark 10-year Treasury yield rose to its highest since November 2023 after the announcement, while the 20-year yield climbed to a three-week peak, as did the 30-year yield. Yields rise when prices fall. U.S. yields extended their rise on Thursday after producer prices increased in August, and oil prices rose above $100 per barrel. "There was the feeling in the marketplace that the Treasury could have made a statement," said Padhraic Garvey, head of global rates and debt strategy at ING in New York, referencing expectations from some market participants that the buyback could have been as large as $10 billion. "I suspect this is just the opening gambit." The market response also underscored the limits of buybacks as a tool for controlling borrowing costs, analysts said. Treasury purchases can improve liquidity in older securities and, at the margin, support long-end prices. But a $6 billion operation is tiny relative to the roughly $32 trillion Treasury market, analysts said, and does little to alter the broader supply and demand dynamics that have driven yields sharply higher over the last three months. Investors may have also wanted clearer evidence that the $6 billion was a floor rather than a ceiling for future operations.

Edgy bond investors unconsoled by Bessent's big buyback

Bessent says he is trying to slow things down

Treasury buyback larger, but markets wanted more

Yields rise as investors question the scale of support

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