US market sours on $6b Treasury buyback

The United States Treasury Department said on Wednesday that it will buy up to $6 billion of 10-year to 20-year Treasurys when it executes its buyback operation on Thursday afternoon, but the bond market didn't respond as expected.

Earlier on Wednesday, the Treasury's scheduled release put the number at $4 billion.

According to the announcement, there will be six more buyback operations targeting longer-term debt through early November. The Treasury said future buybacks will be a minimum of $4 billion each. After that, the Treasury Department will reveal its plans for the next three months.

Last month, the buyback was $2 billion.

The purchases are intended to increase bond prices — which would reduce their yields, as they are inversely related to price — with the aim of lowering interest rates.

However, the bond market rebuked the US administration's move by pushing the 10-year yield to its highest in three years to an intraday high of 4.857 percent on Wednesday. The intraday high for the 20-year yield climbed to 5.322 percent, also the highest in three years.

Investors had expected a larger buyback — between $7 billion and $8 billion — to help lower costs associated with borrowing.

US Treasury Secretary Scott Bessent said on Tuesday before the announcement that part of his job is to ensure that the markets are not misreading the fundamentals of the US economy.

"Now I try to slow things down, to get people to get out of their fever dream and look at the facts," Bessent said.

The higher Treasury yield means increased interest rates for companies to borrow money to invest, and for consumers to buy houses, cars and other things bought on credit.

"Make no mistake, investors are worried about the US economy," said Anthony Moretti, associate professor at the Communication and Organizational Leadership Department at Robert Morris University in Pennsylvania.

"So, too is the average American. Inflation, gas prices and mortgage rates. All three are eating into Americans' purchasing power," Moretti told China Daily.

Multiple factors

The rising yields are driven by multiple factors, according to experts. There is no foreseeable end to the ongoing conflict between the US and Iran, which is pushing oil prices higher. On Wednesday, Brent crude futures rose above $100 a barrel for the first time since late July, and West Texas Intermediate futures increased more than 3 percent to above $96 a barrel. Also, rising government debt, which hit $40 trillion in August, is driving up bond yields through increased government borrowing to fund the deficit.

"This decision might help temper some of the worst economic news, but yet again the big question has to be asked: What is the strategy? Good luck getting a firm answer," Moretti said.

Brett House, an economist at the Columbia Business School, told CBS News that the buyback doesn't solve the deficit problem.

"Unless Bessent forces the Fed to print money to buy these bonds, it is still coming out of Treasury revenues, and doesn't cure the fact that this government is building up a deficit and as a result is going to have to issue more debt," he said.

In addition, investors are borrowing heavily to fund massive AI data center buildouts.

While investors were disappointed in not getting a larger buyback, some experts are against such moves.

Stanley Druckenmiller, chairman and CEO of Duquesne Family Office, and ex-mentor of Bessent — both of whom worked under the famous financier and hedge fund manager George Soros — wrote in an op-ed piece in the Wall Street Journal that "every basis point of artificial yield suppression is a subsidy to procrastination".

"Suppressed long rates sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else's problem," he wrote.

He said the government's move to manipulate the bond prices would damage the credibility of the Treasury market.

"That asset doesn't regain its value so easily," Druckenmiller said. "Governments defending prices against fundamentals always lose."

mayzhou@chinadailyusa.com