US Treasury Yields on Long-Term Bonds Decline
- The decision places the Federal Reserve under inflationary pressure, with experts warning of its inability to print money
Arabic – U.S. Treasury Secretary Scott Bessent has intensified efforts to contain the rise in long-term Treasury yields by expanding the government debt buyback program, a move aimed at calming bond market turmoil after U.S. long-term bond yields hit their highest levels since 2007, raising questions about their impact on the Federal Reserve’s efforts to combat inflation.
The U.S. Treasury announced it would raise the cap on long-term bond buybacks from $2 billion to at least $4 billion.
The decision helped halt a sharp wave of selling that pushed yields to levels causing market concern, amid fears of repercussions on borrowing costs for households, businesses, and the U.S. government, according to CNBC.
Despite the program’s limited size relative to the total outstanding debt, many investors viewed the step as further evidence of Bessent’s ongoing efforts to lower Treasury yields, particularly for the benchmark 10-year note.
Economists and bond market traders warned that this policy could carry undesirable side effects, including increased inflationary pressures and making the cost of servicing the U.S. government’s $32.2 trillion debt more sensitive to any future interest rate hikes.
Joseph Brusuelas, chief economist at RSM US, said political pressure could lead to demands for the central bank to support the government’s fiscal objectives, which could distort market signals and complicate the task of Federal Reserve Chair Kevin Warsh.
The buyback operations officially aim to improve liquidity in less-traded bonds, particularly those with maturities between 10 and 30 years. The idea is to withdraw some older issues from the market to allow financial institutions to hold newer, more liquid issues, potentially easing pressure on yields.
Experts noted that the Treasury does not follow a quantitative easing program like the Federal Reserve, as it lacks the ability to print money; instead, it must fund buybacks through new debt issuances.
However, debate centers on market expectations that the Treasury will replace long-term bonds with short-term Treasury bills, a move viewed as an attempt to lower long-term borrowing costs.
Markets reacted immediately to the decision, with bond yields falling after the announcement. The yield on the 10-year Treasury note had risen 70 basis points since the outbreak of the war with Iran, reaching 4.74% before dropping to 4.65%.
The step followed other measures taken by Bessent that helped curb the rise in long-term yields. In July, he used Treasury funds to support the Japanese yen, and on August 5, the Treasury announced its intention to rely more heavily on short-term financing compared to long-term, despite the Treasury Debt Advisory Committee recommending keeping the share of Treasury bills near 20% of outstanding debt, compared to the current 22.2%.
