Treasury to double down on buybacks to steady bond market
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Washington is mounting its biggest effort yet to fight the rise in borrowing costs that are hitting homebuyers, businesses and the government's own finances.
- What's new: Treasury said Wednesday morning that it would put more muscle behind an effort to steady the long-term bond market — a surprise announcement that immediately drove borrowing costs down.
Why it matters: The timing underscores how central lower interest rates have become to the Trump administration's definition of a strong economy.
- Consider how the run-up in yields has compounded the affordability squeeze heading into the midterms.
- Elevated rates were keeping mortgages and other loans painfully expensive alongside the broader inflationary fallout from the Iran war.
What they're saying: "This is effectively the equivalent of verbal intervention from the U.S. Treasury," Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, tells Axios.
- He calls it "Treasury firing a warning shot across the market's bow rather than doing something just yet," noting that the larger purchases don't begin for another few weeks.
Details: The Treasury Department is increasing its purchases of long-term government debt — a mechanism that should boost demand for bonds at a time when investors have been selling them (and, in turn, pushing yields higher).
- Treasury will raise the maximum size of each purchase to at least $4 billion, from $2 billion now, focusing on longer-term Treasuries in the 10- to 30-year range — exactly where yields have been under the most pressure.
- The expansion will run from Sept. 9 through Nov. 4, when Treasury conducts its next regular review of its borrowing plans — a schedule that also notably overlaps with the final stretch of the midterm campaign.
"This increase in buyback operation sizes reflects Treasury's desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants," the Treasury Department said in a statement.
- Treasury says investors have routinely offered it more long-term bonds than it has been willing to buy, giving it room to expand the program.
By the numbers: The knee-jerk reaction was swift.
- The yield on the 30-year Treasury bond fell as much as 0.1 percentage point following the announcement, an unusually sharp move so quickly.
- But it barely dents the run-up of recent weeks. Long-term borrowing costs remain near multidecade highs. The 30-year yield was around 5.2% at 12pm ET Wednesday, up from roughly 4.63% just before the Iran war.
The big picture: Treasury's purchases are tiny relative to the roughly $30 trillion U.S. government debt market. In other words, the purchases alone will not determine where long-term interest rates go.
- The symbolism is what matters — that Treasury is showing it's willing to use the tools it has to ease some of the pressure in a market that has been bleeding for weeks.
Yes, but: It's unclear how long the reprieve will last. The last time the administration tried to use the government's balance sheet to push borrowing costs lower offered only fleeting relief.
- Housing chief Bill Pulte this year championed purchases of mortgage bonds by Fannie Mae and Freddie Mac to help bring down mortgage rates.
- The announcement initially pushed mortgage rates lower, but the relief proved fleeting. Rates have since climbed back up.
Treasury Secretary Scott Bessent has shown willingness to step into markets when prices move in an unwelcome direction.
- Treasury intervened to prop up the Japanese yen earlier this month, producing an immediate market reaction that later faded.
- That intervention also reduced the risk that Japan would need to sell U.S. Treasuries to raise dollars to support its currency.
The bottom line: Washington is showing it won't sit by as high borrowing costs become an economic and political liability.
Several factors ignited the recent bond market sell-off. But at least some of the rise followed early missteps by Federal Reserve chairman Kevin Warsh.
- Warsh's reluctance to spell out exactly how the central bank would respond to higher inflation helped fuel a sell-off after the central bank's policy meeting in July.
- Now, Bessent is taking a step that pushes in the opposite direction, adding demand for long-term bonds and helping reverse some of that move.
- Bessent, for his part, last month defended Warsh's lack of so-called forward guidance, calling the market adjustment a "detox" from years of excessive Fed guidance.
"This is not QE," TD Securities' Goldberg says, referring to the Fed's practice of creating money to buy bonds and push down longer-term interest rates.
- The Treasury has to pay for the long-term bonds it buys back by borrowing elsewhere, effectively swapping some longer-term debt for shorter-term debt.
- "This is their own little version of 'Operation Twist,'" Goldberg says.
- That was the strategy the Fed used in 2011, buying long-term bonds while selling shorter-term debt to help drive down long-term borrowing costs.
What to watch: The Fed and Treasury have very different jobs, and the Fed independently sets interest rates.
- But Bessent and Warsh have pushed for the two institutions to work more closely together on areas where their policies overlap.
- Warsh had previously floated a new Fed-Treasury "accord" aimed at better coordinating their approaches to government debt and the Fed's balance sheet.
- One area their interests overlapped: Bessent called for the Fed to expand a lending backstop for foreign governments that was used during the U.S.-Japan intervention in the yen. Any expansion would require the Fed's approval.
