The US Treasury said on Wednesday it would at least double purchases of long-term government debt, expanding buybacks of securities maturing in 10 to 20 years and 20 to 30 years from $2bn to at least $4bn.
The larger purchases will begin on September 9. The Treasury said the change is intended to provide greater liquidity support to long-dated US debt, significantly expanding a programme designed to improve market functioning in older and less actively traded off-the-run securities. The move comes amid strains in the $32tn US Treasury market and concerns about elevated borrowing costs.
US government bonds rallied after the announcement. The 30-year yield fell 0.08 percentage points to 5.21 per cent, while the 10-year yield declined 0.04 percentage points to 4.67 per cent. The 30-year yield had reached almost 5.34 per cent on Tuesday, its highest level since 2007, while an auction of 30-year debt last week saw investors buy government bonds at the highest yield since 2001.
Daniel Murray, deputy chief investment officer at EFG International, said the administration was becoming concerned about weakness at the long end of the yield curve. Robert Tipp, chief investment strategist at PGIM, described the larger buybacks as an important indication that the Treasury was concerned about the sell-off in longer-dated debt.
The dollar also weakened after the announcement, with an index against six peers falling 0.7 per cent on Wednesday. George Saravelos of Deutsche Bank FX Research said currency markets were likely to pay closer attention to further measures supporting the Treasury market, with the dollar more likely to weaken if such measures were seen as distorting market pricing.
Barclays analysts said the decision to enlarge buybacks only weeks after the quarterly refunding announcement showed that the recent rise in yields had caught officials’ attention. Jefferies said the unexpected nature of the announcement reduced the credibility of Treasury guidance on borrowing plans.
Demand at the Treasury’s $16bn auction of 20-year bonds on Wednesday afternoon was modest. The debt was sold at a yield of 5.204 per cent, compared with 5.199 per cent in the secondary market. The bid-to-cover ratio was 2.53, against this year’s average before the sale of 2.66. Gennadiy Goldberg, head of US rates strategy at TD Securities, characterised the auction as neither particularly weak nor particularly strong.
Wall Street expects the Treasury to offset the buybacks with more short-term issuance, shifting more borrowing towards Treasury bills that mature in one month to one year. Yields on three- and six-month bills rose slightly on Wednesday as expectations for more short-term issuance increased. Murray said the amount of issuance required to finance the deficit implied greater issuance at the short end of the curve.
Treasury secretary Scott Bessent is focused on keeping longer-term government borrowing costs, particularly the 10-year yield, low. The 10-year note is closely watched because it tends to have a greater impact on borrowing costs for businesses and households, including residential mortgages.
Bessent originally pledged to reduce the federal budget deficit from about 6 per cent to 3 per cent by the end of Donald Trump’s second term. Projections remain elevated because of Trump’s extension of tax cuts and pledge to increase defence spending to $1.5tn a year. Economists warn that longer-term borrowing costs will probably remain high amid concerns over inflation and large US deficits.
Steve Englander, global head of G10 FX research and North America macro strategy at Standard Chartered, said medium- and long-term investors would want to see an improvement in the deficit outlook before buying long bonds. That leaves the Treasury’s expanded buyback programme addressing market liquidity while long-term financing conditions remain tied to the broader deficit and inflation outlook.
