The United States Treasury Department said on August 19 that it would increase repurchases of longer-term bonds, doubling sizes for 10- to 30-year Treasury debt to at least $4 billion per operation. Treasury Secretary Scott Bessent is trying to contain surging yields following renewed tensions in the Middle East.
Treasury buybacks echo Operation Twist, but the market may not follow
Federal Reserve Chair Kevin Warsh’s plan for free markets to set borrowing costs looks to have lasted all of three months. On Wednesday, the U.S. Treasury announced increased repurchases of 10- to 30-year bonds, a stark intervention as yields rose to levels last seen nearly two decades ago. It echoes a maneuver dubbed “Operation Twist” employed in the 1960s and 2010s. This time, though, it clashes with Warsh’s effort to browbeat bond investors into accepting much less policy guidance. The simultaneous twist-and-shout will only produce discord.
Back in 1961, the inaugural Operation Twist - named after the dance craze then sweeping the country - sought to keep near-term yields firm enough to attract inflows while pushing down longer-term rates to encourage capital investment. The playbook involves increasing sales of bills on the short end while buying back bonds. This week, following a jump in 30-year yields, Treasury Secretary Scott Bessent essentially ended up recreating that policy mix. On Wednesday, it succeeded in sparking a small bond rebound.
The theory goes that, while all bond yields are influenced by where investors believe central banks will set interest rates, the policy expectations game matters much more for short maturities. At the long end of the yield curve, uncertainty about inflation and growth should be more important, giving rise to the so-called term premium demanded by investors. In turn, that should make bond prices more sensitive to subtle shifts in supply, hence the buybacks.
Yet a 2011 paper by researchers at the San Francisco Fed suggests that the original Operation Twist lowered yields only by about 15 basis points, despite repurchases amounting to 1.7% of GDP. The 2011 edition made a bigger dent, but achieved at most a 60 basis-point reduction only by spending 4.1% of GDP, according to a 2012 paper from the Bank for International Settlements. By comparison, this latest increase in buybacks barely registers. And, indeed, on Thursday yields ticked back upward again.
What the past two decades overwhelmingly show is that central banks' bond-market interventions only have lasting effects when used as a signaling tool for future monetary policy. But Warsh's entire agenda is to not signal anything. His view is that borrowing costs should be set by market forces, not overweening guidance from the central bank chief. Bessent, who is already teasing a bigger intervention, is left to fix any market chaos.
The uncertainty created by the central bank will probably outweigh those efforts. Between 1942 and 1951, the Fed directly tried to cap yields, only to fail whenever markets perceived a conflict with officials’ own setting of interest rates. The Treasury can twist all it wants: the Fed is shouting that investors shouldn’t dance along.
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