The rise in U.S. and European government bond yields to multi-year highs — and, in some cases, record levels — has been in focus in recent weeks, and not just among analysts.
Policymakers seem to be getting worried too, judging by the U.S. Treasury doubling its long-term debt buybacks from $2 billion to at least $4 billion after 30-year yields hit their highest level since 2007. The overall effect, though, was limited, with the 10-year Treasury yield still ending the week at 4.73% and the 30-year yield moving back above 5.2%. The move in precious metals, particularly silver prices, is another part of the market picture to watch as investors weigh inflation risks, interest-rate expectations and growing fiscal concerns.
That’s because the program simply removes less-liquid bonds and replaces them with benchmark issues, so total debt stays the same and only its structure changes.
The buybacks can slightly narrow spreads and support the prices of the bonds being repurchased, but they don’t change the deficit or public debt: it’s neither debt repayment using a surplus nor QE.
By buying long-term bonds and financing them with Treasury bills, the Treasury also reduces duration in the market, which could put some downward pressure on long-term yields, while short-term bonds are driven mainly by Fed rate expectations. The trade-off is that shorter-term debt must be refinanced more often, making interest costs more sensitive to future rate increases.
Now, as for the news that U.S. Treasury Secretary Scott Bessent could use nearly $1 trillion from the Treasury General Account to buy back bonds, that would give the Treasury plenty of room to influence long-term yields. The catch is that any effect would likely last only a few months, with little long-term impact.
The reason is that pressure on long-term bonds stems from fiscal problems, with debt above $40 trillion, annual interest costs exceeding $1 trillion, and a deficit expected to be around 6% of GDP this year. On top of that, the AI investment boom adds to the pressure, with big tech turning to markets for funding and competing for capital.
Buybacks can’t solve those problems. For long-term yields to fall sustainably, the deficit would need to shrink, AI investment slow, or the Fed ease policy.
Markets will therefore be watching the economic calendar closely for fresh signals on inflation, growth and the Fed’s policy path. Attention then shifts to Fed Chair Kevin Warsh’s Jackson Hole speech on Friday. If markets like his plan to deal with rising borrowing costs, the reaction should be positive.