US Treasury bond buyback impact may prove short-lived: Experts

The US Treasury’s decision to expand its long-term bond buyback operations has eased selling pressure in the bond market, but experts warn the impact could be temporary as high government spending, persistent inflation and rising debt continue to weigh on the outlook.

Investor concerns over mounting government debt triggered a selloff in bond markets this week, not only in the US but also in Germany and Japan. Pressure has been compounded by heavy borrowing from technology companies to finance massive artificial intelligence (AI) investments, while elevated oil prices amid continued conflict in the Middle East have added to inflation concerns.

The US Treasury decided to double the amount per operation in its long-end liquidity support buybacks from $2 billion to $4 billion. The operations cover nominal-coupon securities with maturities of 10 to 20 years and 20 to 30 years, fueling hopes that borrowing costs could ease.

The yield on the benchmark 10-year US Treasury note fell 8 basis points Wednesday to 4.64% and hovered around 4.68% Thursday. The 30-year bond yield dropped 10 basis points to 5.19% before stabilizing at around 5.23% Thursday, after reaching a 19-year high of 5.34%.

Uncertainty over US-Iran relations and risks surrounding the Strait of Hormuz persist, while elevated oil prices and inflation continue to pose risks to bond markets.

Kutay Guzgor, investment research director at Turkish bank Kuveyt Turk, told Anadolu that the Treasury’s decision should not be viewed as a routine liquidity measure, but rather as an intervention aimed at borrowing costs that had shown signs of spiraling out of control.

Guzgor said 30-year yields had climbed to their highest levels since 2007 and begun threatening the real economy through mortgage and corporate credit markets, meaning the Treasury’s move could be seen as a version of the Fed’s Operation Twist policy, a maneuver aimed at stimulating private-sector borrowing and spending.

He noted that the US Treasury stepped in instead of the Fed due to the ongoing inflation risks, using the liquidity derived from issuing more short-term bonds to the market to artificially lower interest rates.

“This is not a permanent solution, however, and rather a temporary one to halt the rapid rise in bond yields -- the term premium investors demand to compensate for long-term uncertainties will continue to be high as long as the US grapples with record budget deficit, rising defense spending, and persistently high inflation,” he said.

“The weak demand for the 20-year Treasury following the decision also shows that the market has yet to be fully convinced by this move and that investors want to see concrete improvement in US budget dynamics before embracing the optimism,” he added.

Guzgor said the Fed remained constrained by its balance-sheet reduction goals, elevated inflation and restrictive monetary policy, effectively shifting the task of preventing a potential tightening of financial conditions toward the Treasury.

He noted that the Treasury could further adjust its borrowing composition if long-term yields accelerate toward the 5% range, relying more heavily on the short end of the yield curve rather than longer-dated securities to finance budget deficits.

“This strategy still has limits, as an excessive increase in the share of short-term borrowing within the budget threatens interest rate rollover, and constant intervention into market dynamics could affect the credibility of the US dollar in the medium term,” he said.

“The Treasury has the tools to keep long-term interest rates in check but any intervention made without addressing the macroeconomic fundamentals would just postpone the bond market’s current stress to the next quarter,” he added.

Kyle Rodda, senior financial markets analyst at Capital.com, said the Treasury’s decision could ease short-term pressure in the bond market and pull long-term interest rates below where they otherwise would have been, but stressed that upside risks to yields remain and could require further intervention in the future.