Key Takeaways:
Treasury Secretary Scott Bessent's plan to double long-dated bond buybacks and tilt issuance toward bills has so far failed to hold down the 10-year yield, which closed the week near 4.75 percent.
Treasury Secretary Scott Bessent's plan to double long-dated bond buybacks and shift issuance toward short-term bills failed to cap borrowing costs, with the 10-year yield closing the week at 4.73 percent, near its highest since he took office. The Aug. 19 announcement, which Bessent dubbed a "Treasury twist" in a nod to the Federal Reserve's 1960s program, initially drove long yields lower before they climbed straight back up.
"Every route to lasting relief for the long end runs through something the administration doesn't want," said Matt King, founder of Satori Insights, citing a smaller budget deficit, a slide in the stock market, or a decline in AI investment as the only paths to lower long-term yields.
The 30-year yield touched 5.31 percent on Aug. 17, a level last seen in 2007, before the announcement pulled it to 5.19 percent. The dollar fell nearly 0.8 percent against a basket of currencies on the news, while inflation expectations measured by swap rates and gold prices rose. The 10-year yield, Bessent's stated north star, has climbed from about 4.20 percent when he was nominated in November 2024 to 4.73 percent, pushing 30-year mortgage rates to around 6.75 percent.
The intervention comes as the federal deficit is projected near 6.6 percent of GDP in fiscal 2026, with net interest payments running above $1 trillion a year, and as the Treasury plans $739 billion of new borrowing this quarter. With midterm elections two months away and Trump's approval rating at 33 percent, Bessent's tools — buybacks, bill issuance, and a possible end to the 20-year bond — are running up against forces beyond his control.
The mechanics of the program matter. When the Fed buys bonds under quantitative easing, it credits bank reserves it can create at will. The Treasury has no such power — it spends out of its checking account at the Fed, funded by taxes or borrowing. So each repurchase of a 30-year bond must be financed by issuing debt elsewhere. With coupon auction sizes frozen for at least several quarters, the marginal instrument is the bill, a security maturing in a year or less. The buyback thus removes a 30-year bond from the market and, at the margin, replaces it with a short-term bill.
This is the mechanism Stephen Miran and Nouriel Roubini analyzed in a 2024 Hudson Bay Capital paper that coined the term "activist Treasury issuance." Bills, they wrote, "are economically similar to the base money created by central banks," so shifting issuance from coupons to bills stimulates the economy through the same channels as QE. They estimated the Yellen-era tilt toward bills displaced more than $800 billion of coupon issuance and delivered stimulus similar to a one percentage point cut in the fed funds rate.
T-bills now make up 22.2 percent of the $31.4 trillion of marketable debt, above the 15-20 percent range recommended by the Treasury Borrowing Advisory Committee. Every bill-financed buyback pushes the share higher.
The pattern has drawn comparisons to fiscal dominance, the situation in which a government's financing needs, rather than the inflation outlook, steer monetary conditions. "This is what fiscal dominance looks like as the fiscal authority leans on the central bank to subordinate its goal of price stability to the government's borrowing and political needs," said Joseph Brusuelas, chief economist at RSM US. Steps like the buyback expansion, he added, "will prove to be a temporary salve to an open financial wound of our own making."
The wound is a deficit trajectory that requires $739 billion of new borrowing in a single quarter while consumer prices rose 3.4 percent over the year through July, above the Fed's 2 percent target. Bessent has argued investors are acting on "bad information" about the deficit and vowed to refocus attention on Trump's fiscal-consolidation program. But the administration's earlier attempt at spending cuts — Elon Musk's Department of Government Efficiency — claimed savings of only $215 billion, roughly 3 percent of last year's budget, a figure the Government Accountability Office said lacks transparency and reliability.
The dynamic also puts Bessent at odds with Fed Chair Kevin Warsh, who has come close to endorsing the rise in yields. "Markets have done quite a bit," Warsh said on July 29, adding that "market prices will continue to respond in the direction and magnitude they see fit." Warsh, who opposed QE in the early 2010s, delivers his first Jackson Hole speech on Aug. 27-29, where investors will watch whether he draws a line between the Fed's balance sheet and Treasury's operations.
Some market participants doubt the intervention matters at all. "Buybacks are more signal than substance," said Rebecca Patterson, a senior fellow at the Council on Foreign Relations and a JPMorgan and Bridgewater veteran. "The more effective — and sustainable — policy approach is through Fed quantitative easing." Bessent has called sustained QE a "perpetual dosing regimen," and Warsh has been one of its most vociferous critics, leaving investors to set the yield curve.
"The economy has been resilient and there is a global competition for capital," said Priya Misra, a portfolio manager at JPMorgan Asset Management. "It makes sense that rates have been moving higher."
Treasury will announce future buyback sizes at the Nov. 4 refunding. If the bill share keeps climbing past 22 percent, the government is holding down long rates by financing itself with ever shorter maturities — leaving the debt just as large but moving its due date closer.
This article is for informational purposes only and does not constitute investment advice.
