Bessent's $1 trillion buyback plan draws Wall Street fire

Treasury Secretary Scott Bessent's plan to tap a roughly $950 billion cash account for bond buybacks marks the most interventionist debt management in decades, drawing sharp criticism from Wall Street even as market indicators show the strategy is gaining traction.

"Any government that attempts to defend asset prices against fundamentals is ultimately doomed to fail," Stanley Druckenmiller, founder of Duquesne Family Office, said in a recent op-ed. "The only variable is how much money they will waste before surrendering to the market."

The Treasury plans to at least double buybacks of 10- to 30-year bonds starting Sept. 10, with individual operations potentially exceeding $4 billion, up from $2 billion previously. The 30-year yield hit 5.275 percent, its highest level in more than 15 years, while the 10-year yield traded around 4.70 percent. The Treasury General Account, the federal government's primary operating account at the Federal Reserve, holds roughly $950 billion.

The stakes are high: U.S. national debt has passed $40 trillion, and long-term borrowing costs are climbing. If the Treasury's intervention fails to contain yields, the government faces higher debt-service costs, while critics warn that using the cash reserve for buybacks could weaken the dollar and fuel inflation.

30-Year Yield Hits 15-Year High

Citadel Securities called the buyback program "financial repression" that risks undermining the dollar and stoking price pressures. "The Treasury Department's efforts to restrain long-term borrowing costs through bond buybacks amount to financial repression," the firm said.

Despite the criticism, key market indicators suggest the program is having an effect. Since Bessent announced the expansion last week, U.S. Treasuries have outperformed same-maturity swaps, with the 30-year swap spread narrowing to its tightest level since February. Benchmark yields declined after initial choppy trading, though the 30-year yield has since climbed back above 5 percent.

The last time long-dated Treasury yields traded at these levels was in 2007, before the global financial crisis. The current episode differs in that the Federal Reserve is not actively suppressing yields through quantitative easing, leaving the Treasury to intervene directly in the market.

The yield surge has hit long-duration bond funds hard. The Vanguard Extended Duration Treasury ETF, which holds 80 U.S. Treasury bonds with an average effective maturity of 24.5 years, has delivered annualized returns of negative 12.67 percent over the past five years. The iShares 20+ Year Treasury Bond ETF, with a weighted average maturity of 25.7 years, has lost 8.18 percent annually over the same period.

TGA Funding Question Remains Open

Two senior Treasury officials told Reuters that the TGA is considered available for purchases of older, less frequently traded Treasury securities, although they did not indicate how much could be deployed or when such a move might occur. Bessent said the Treasury would continue with its planned auction schedule even as it increases bond buybacks.

Using the TGA would allow the Treasury to purchase bonds without necessarily issuing additional short-term debt to raise the cash needed for the transactions. The account is the federal government's primary operating account at the Federal Reserve and is used to manage government receipts and payments.

The strategy has attracted skepticism from market participants who argue the scale of buybacks remains small relative to the size of the Treasury market and the amount of new debt the government needs to issue. Others question whether using a large cash reserve for bond purchases could create uncertainty about the Treasury's traditional approach to debt management.

Citi analysts have also warned that the buyback push carries a dollar cost, while some investors have drawn comparisons to Japan's experience with yield curve control, which ultimately required the Bank of Japan to abandon its bond-buying program.

The Treasury's moves are being closely watched ahead of the Federal Reserve's annual economic symposium in Jackson Hole, where investors are looking for signals on the future path of interest rates. The 10-year yield stood at 4.654 percent on Tuesday, down more than 4 basis points on the day, as the debate over the buyback program continued.

This article is for informational purposes only and does not constitute investment advice.