Move Along, Nothing to See Here

Treasury Secretary Scott Bessent announced on Wednesday that the US Treasury will be buying back longer-duration bonds while issuing shorter-dated bills, with the intention of injecting liquidity and lowering rates. Bonds initially rallied on the news but reversed course on Thursday and ended up right back where they were prior to the announcement. Why?

Easy—it’s simply a swap of short bills for long bonds, effectively changing the structure of the US debt market but not really tackling the root causes of rising rates in the first place. Furthermore, it is a drop in the bucket (buybacks will increase from $2 billion to $4 billion) and is unlikely to meaningfully change the supply and demand dynamics of the Treasury market—a dynamic which pushed 30-year bond yields to highs not seen in nearly two decades this week. It’s not quantitative easing (that’s conducted by the Fed), it doesn’t change the outstanding size of US debt, and technically it isn’t even yield curve control. Taken all together, I’m not surprised the rally reversed.

How should fixed income investors view this development? First off, recognize that it is unlikely to single-handedly shift broader interest rate trajectories, at least in the near term. For those convinced rates will continue to rise, I don’t see much reason to panic or reverse course. For those convinced rates will fall, this probably isn’t the catalyst you’ve been waiting for. However, it does signal that the Treasury is somewhat concerned with the current level of yields. If they decide to expand the intervention in the future or it morphs into another Federal Reserve quantitative easing program, then all bets are off. But as it stands now, ‘Move along, nothing to see here’.

Austin Carr, APMA®