Scott Bessent, the U.S. Treasury Secretary, drew a line when asked whether there are plans to reduce the size of long-term Government Bonds auctions going forward, saying the Treasury would "adhere to predictable market principles."
Combining major media reports, including Bloomberg and CNBC, on the 24th local time, the Minister said at a news conference that the Treasury would "continue the regular Government Bonds auction program" when asked whether there are plans to reduce the size of long-term Government Bonds auctions going forward. If fewer long-term Government Bonds are issued, market supply declines and yields can fall. However, the remarks are interpreted as making clear that the U.S. government will not immediately attempt changes that upend market expectations, such as cutting long-term issuance, nor break existing Government Bonds management principles. The size of Government Bonds issuance is expected to be decided when the November quarterly Government Bonds issuance plan is announced.
The Minister then sidestepped a question on whether the Treasury would further increase the size of Government Bonds buybacks, saying, "We have not bought a single Government Bonds yet, and the next buyback is on Sept. 9." A buyback is a step in which the government directly purchases Government Bonds circulating in the market. When buybacks occur, demand for Government Bonds jumps and, conversely, the Government Bonds yield that serves as a benchmark for market rates falls (Government Bonds prices rise). It signals that the government intends to play a kind of firefighter role to stem the surge in rates that burdens the broader economy. Earlier, on the 19th, the Treasury said it would at least double buybacks of long-term Government Bonds maturing in 10 to 30 years.
Investors are focusing on where the massive buyback funds will come from. Initially, the financial market leaned toward expectations that the Treasury would issue new short-term Government Bonds and use that money to buy long-term Government Bonds. The U.S. Treasury currently holds $935 billion in cash in its general account at the Federal Reserve. The general account is a kind of government emergency fund account set aside for national emergencies or routine budget expenditure. Morgan Stanley strategist Martin Tobias said, "There is a fairly high chance the Treasury will newly change its policy on using cash balances."
But there are mounting concerns that hasty market intervention without clear principles could cause side effects. Blake Gwinn, head of strategy at Royal Bank of Canada (RBC), said, "Rather than having had a deep discussion about cash policy, it looks like a very clumsy attempt just to stem bond selling." Citadel Securities also criticized the Treasury's buyback-style intervention as "financial repression" that heightens inflation risk.
Market experts said the Treasury's short-term stopgaps actually undermine predictability in the Government Bonds market. If U.S. Treasury policy cannot be trusted, jittery investors will demand higher interest when buying Government Bonds. In that case, the forced measures rolled out to rein in rates could instead have the opposite effect of pushing Government Bonds yields back up, experts noted.