Treasury expands long-term bond buybacks, prompting concerns over inflation and Fed independence
The Treasury Department announced it will double its maximum monthly buyback of long-term debt, a move that halted a recent sell-off but raised questions about inflation risks and pressure on the Federal Reserve.
The Treasury Department said on Wednesday it will increase its monthly repurchase of long-term Treasury securities, raising the ceiling from $2 billion to at least $4 billion. The expanded buyback program helped reverse a recent decline in bond prices that had pushed yields on 10-year notes to around 4.74%.
The action is intended to improve market liquidity for less-traded securities, particularly bonds with maturities of 10 to 30 years. By removing older, “off-the-run” issues from the market, the Treasury hopes to free up balance-sheet capacity for investors to buy newer, more liquid issues, which could lower yields.
Economists note that while the buybacks are modest relative to the $32 trillion of debt held by the public, they may increase inflationary pressure and make interest-costs more sensitive to future rate hikes. “We’re slowly moving to the point where the logic of populism is going to insist that the central bank support fiscal objectives,” said Joseph Brusuelas, principal and chief economist at RSM US.
Critics also point out that the Treasury must fund the repurchases by issuing additional short-term bills, potentially altering the debt profile and influencing the yield curve. “The Fed can print money and buy what they want. The Treasury doesn’t have that capability. They need to fund the buybacks by issuing more bills,” said Brij Khurana, a fixed-income portfolio manager at Wellington.
The move comes amid broader fiscal pressures, with the federal budget deficit projected to reach $2.1 trillion this year and net interest payments already exceeding $960 billion for the current fiscal year. Some observers warn that a shift toward shorter-term debt could raise the government’s interest expenses if the Fed raises rates.
Federal Reserve Chair Kevin Warsh, who has faced criticism for his handling of long-term yields, is expected to address the issue at the upcoming Jackson Hole symposium. Analysts suggest that continued Treasury interventions could complicate the Fed’s ability to gauge market signals and maintain policy independence.