On Wednesday the Treasury Department announced its plan to more than double the size of its government debt repurchases, in an attempt to drive yields lower during a time of market stress.
The news comes after the 30-year bond yield touched 5.323%, the highest level it’s reached in nearly two decades.
The Treasury wants to focus this large buyback program on 10-20 year and 20-30 year maturities, the yields that have recently been under pressure. These higher demand for bonds will increase bond prices, lowering yields. Immediately after the announcement we seen the 10-year yields drop to 4.647% and the 30-year fall to 5.196%.
This idea presents new issues now. The Fed is trying to influence short/term rates but investors aren’t seeing changes in government borrowing, and inflation expectations. Investors also notice that Treasury issuance is going to rise, and corporations will borrow more money for developments like data centers as borrowing costs lower. The supply of bonds will be outpacing the demand.
With all of these concerns investors can demand higher yields, which is how we seen the 30-year yield heading towards 5.3%.
This decision by the Treasury doesn’t eliminate the debt, but instead changes which securities are outstanding. Buying back 30-year bonds only reduces the amount of 30-year bonds on the market, the Treasury still needs to finance the government’s debt so it’s just going to issue that debt somewhere else. The debt isn’t actually being reduced.
In the short/term yields will fall, but long-term the government still has huge deficits, so the Treasury is going to have to issue out more debt, and investors are going to demand more compensation for this inflation risk. This will lead to upward pressure on yields.
The Fed has this dream of inflation reaching 2%, buying bonds will lead to higher bond prices, lowering yields and borrowing costs, essentially reversing the tightening the bond market did.
