U.S. Treasury Expands Long-Term Bond Buyback by Threefold, Market Reaction is Tepid

[Mexico City = Shim Young-jae, Correspondent] The U.S. Treasury has expanded the scale of its long-term bond buyback to three times the original plan. It has decided to purchase up to $6 billion in bonds maturing in 10 to 20 years, but the market has reacted with disappointment.

According to Bloomberg's report on the 9th (local time), the U.S. Treasury announced that as the first measure of the expanded bond buyback program, it will buy up to $6 billion in bonds maturing in 10 to 20 years. The previous limit was $2 billion. Following the announcement, the yield on the U.S. 10-year Treasury bond rose by about 6 basis points to 4.85% as of the afternoon in New York.

Expansion from $2 billion to $6 billion

According to Bloomberg, the U.S. Treasury has increased the size of the next long-term bond buyback to three times the original plan. It plans to purchase up to $6 billion in U.S. Treasury bonds maturing in 10 to 20 years.

This action marks the first long-term purchase under the expanded buyback program.

Bloomberg assessed this as a move showing Treasury Secretary Scott Vessen's determination to curb the recent rise in long-term borrowing costs in the U.S.

However, the market showed weakness immediately after the announcement. U.S. Treasury prices fell further after the announcement, and the yield on the 10-year bond rose by about 6 basis points to 4.85% as of the afternoon in New York.

Earlier, the yield on the 10-year bond had reached its highest level since 2023.

The market had formed expectations that the buyback size would be larger. Secretary Vessen had previously publicly mentioned the possibility of purchases exceeding $4 billion.

Initially, the buyback limit was set at $2 billion.

"Expanded Threefold, but Market is Disappointed"

Steven Cheung, a strategist at Deutsche Bank, told Bloomberg, "Although the scale has been increased threefold, the market is receiving it disappointingly." He explained, "It is not the level of 'Shock and Awe' that investors wanted."

He continued, "The Treasury has created a monster for itself, and now it has to keep feeding it."

Bloomberg reported that the market had been expecting a larger buyback following Secretary Vessen's recent comments.

Secretary Vessen clarified on the 8th that he could not change the 'equilibrium price' of Treasury bonds themselves. However, he explained that the goal is to slow the pace of price movements and prevent negative narratives from becoming entrenched in the world's largest bond market.

Remaining Six Buybacks Also Minimum of $4 Billion

The U.S. Treasury has also indicated that for the remaining six long-term nominal bond buybacks scheduled for this quarter, the maximum purchase size will be set at over $4 billion each. This is the same level as the expanded plan first announced by the Treasury on the 19th of last month.

At that time, the Treasury stated that it would "at least double" the size of the long-term bond buyback, which was previously $2 billion.

According to the tentative schedule presented by Bloomberg, the announcement on September 9 is for a maximum of $6 billion.

On September 23 and 30, at least $4 billion is scheduled for each. On October 7, 14, and 26, at least $4 billion in buybacks is also planned. The buyback on November 3 will also be at least $4 billion.

Actual purchases will take place the day after each announcement.

Vessen: "Preventing Negative Narratives from Taking Hold in the Market"

The background for the U.S. Treasury's expansion of the long-term bond buyback lies in concerns over rising long-term Treasury yields. According to Bloomberg, the yield on 30-year Treasury bonds rose to its highest level since August 2007.

Secretary Vessen stated that at that time, there was a growing perception in the market questioning the U.S.'s ability to repay its debt.

He claimed at an event in Texas, "Concerns that the U.S. would not be able to repay its debt moved the market," adding, "It was an absurd story, but it became the dominant narrative."

One of the objectives of the Treasury bond buyback is also to improve market liquidity. The aim is to allow banks and other financial institutions to pass on existing Treasury bonds that are difficult to trade to the Treasury, thereby encouraging more active participation in new Treasury auctions.

"More Proactive Treasury Secretary"

Krishna Guha, head of Evercore ISI's economics team, evaluated Secretary Vessen as adopting a very proactive role as Treasury Secretary in his comments to Bloomberg.

Guha stated, "Scott has clearly embraced a very proactive model as Treasury Secretary."

He assessed that Secretary Vessen is tactically skilled in knowing when and how to surprise and move the market, and has achieved certain results in the short term. However, he pointed out that the question remains whether the effects of such interventions can persist without fundamental changes in economic conditions.

"Setting Maximum of $6 Billion Does Not Mean Buying $6 Billion"

Just because the U.S. Treasury has set the maximum buyback size at $6 billion does not mean it will necessarily purchase the full $6 billion.

However, according to Bloomberg, the Treasury has often purchased up to the maximum limit in long-term nominal bond buybacks.

Since the reintroduction of the buyback program in 2024, there have only been two instances out of 52 long-term nominal bond purchases where the maximum limit was not reached.

There is also a possibility that the actual purchase size could exceed $6 billion.

Cheung explained that the Treasury could increase the purchase size in the final buyback announcement compared to the preliminary announcement.

According to the Treasury's guidance on buybacks, the final buyback notice is released at 11 a.m. on the actual purchase day, replacing the previous preliminary announcement.

"Adjusting According to Market Function and Liquidity"

According to Bloomberg, a Trump administration official stated to Fox Business that the Treasury regularly reviews the buyback operations. It explained that the size would be adjusted as needed to support market function and liquidity.

The timing of Secretary Vessen's announcement of the expansion of the long-term bond buyback last month also drew attention from the market, as it was announced separately from the Treasury's usual quarterly bond issuance schedule.

Bloomberg reported that there is growing discussion that the U.S. Treasury's debt management approach is shifting from the previous principle of 'regular and predictable' to a more proactive approach.

Rising Long-Term Rates Also Burden Mortgage Rates

Market participants view the expansion of the buyback as a signal that the Trump administration is concerned about rising long-term borrowing costs, according to Bloomberg.

With the midterm elections in November approaching, the rise in long-term Treasury yields has pushed mortgage rates to their highest level in over a year.

Secretary Vessen refers to the expanded buyback policy as 'Treasury Twist,' a play on the term 'Operation Twist' that the Federal Reserve had implemented in the past to lower long-term borrowing costs.

In a Newsmax interview on the 1st, he stated, "My role is to ensure that no large negative outcomes occur.