The treasury’s buyback program: Intervention or interference?

It ain’t supposed to work this way! I’m talking about a newly announced initiative by the U.S. Treasury whereby the Treasury will be buying back longer-dated Treasury bonds. To be clear, when the government “buys back” a previously issued government bond, it doesn’t hold that bond as an asset. Rather, it retires that debt; and the money that it uses to buy that debt comes from issuing new debt. This buyback program thus doesn’t do anything to reduce the overall debt outstanding. Rather, it ends up restructuring the configuration of when outstanding debt comes to maturity.

The stated objective if this new initiative is “to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations.” I struggle to understand exactly what this means.

The Treasury market is one of the deepest, most liquid markets in the world. Admittedly, some of the debt instruments in the market are more liquid than others (i.e., tighter bid-ask spreads and higher volumes of trading), but that’s a well-known feature of this market. To be fair, I’m not able to know whether the variance in liquidity among alternative debt instruments has become substantially different from what it has historically been. Price dislocations certainly occur between similar maturities, but a class of market participants reacts to such mis-pricings and generally keeps these price disparities within acceptable bounds. Given the market size and structure of the Treasury market, I’m not at all sure that the Treasury should be providing this kind of “liquidity support.” Forgive my skepticism, but I read this new program as an effort to mitigate or potentially reverse some of the developing rise in long-term interest rates, which have recently risen to levels last seen some 20 years ago.

This plan seems to me to be a case of the Treasury putting its thumb on the scale to support one class of market participants at the expense of another. In any case, as a practical matter, virtually any market intervention by the Treasury — irrespective of any alternative stated motivation — would necessarily be advantageous to one segment of the market and detrimental to the other — a reason why the authorities should be especially circumspect about any action they might take. If the Treasury sees some structural problem in the market that needs to be corrected, by all means it should deal with that problem, but I fail to see how a buyback program would serve this purpose, given that it does nothing to alter the underlying market structure.

When federal receipts fall short of federal expenditures, the shortfall is made up by the issuance of debt — i.e., Treasury bills, notes, and bonds. The maturities of those offerings are decided at the discretion of the Treasury. When funding is needed for an extended time frame, we might reasonably expect the Treasury to issue debt with a comparable maturity, recognizing that issuing shorter-term debt would require rolling over that debt, exposing the Treasury to the risk that interest rates might be higher when the debt needs to be refinanced. Of course, that exposure also allows for the opportunity to refinance more cheaply if rates happen to decline. In any case, restructuring outstanding debt maturities to reflect changing sensibilities of prospective cash requirements is all well and good, but that doesn’t appear to be what’s motivating this latest development.

It’s not clear that this coming market involvement is at all appropriate. (The first such transaction is scheduled to occur on September 9.) The recent runup in longer-term interest rates may be telling us something, and this action could end up masking a problem that should be addressed. Most analysis that I’ve read seems to suggest that the recent rise in longer-term interest rates has arisen in connection with growing concerns about the level of debt and/or expectations relating to acerating inflation. In either case, any short-term effort to reverse the rise in long-term interest rate could very well preclude taking the needed remedial actions, thereby allowing those problems to become even more intractable in the future. To me, these concerns seem to be far more pressing than any fears the Treasury may have about liquidity in the government bond market.

In playing this game, the Treasury has encroached on the Fed’s domain. The Fed directly controls very short-term interest rates by its authority to set the target rate on the fed funds rate — an overnight interbank lending rate — but it also can, and does, affect longer-term rates through its open market transactions. The Treasury seems to be horning in on that authority and in so doing, making the Fed’s job harder than it needs to be.

What could go wrong with that? Well, the Fed is supposed to be independent from the executive branch, whereby its monetary policy should be devoid of political influences. The Treasury, on the other hand, is an agency of the executive branch that doesn’t claim any such independence. Particularly with Donald Trump as the head of that branch of government, the Treasury simply can’t be trusted to operate in the best interests of anyone but Trump and his cronies. I suppose I shouldn’t be surprised. Treasury Secretary Bessent is fitting right in with the rest of the sycophantic sell-out cabinet members who have been doing Trump’s bidding.