Markets are set to find out Wednesday just how aggressive the Treasury Department’s bond-buying program will get, as Secretary Scott Bessent dared currency traders to challenge him.
The department is expected to announce around 11 a.m. the size of a buyback operation it announced Aug. 19, an aggressive move and part of a broader strategy to keep a lid on Treasury yields and ensure markets function as intended.
“I am the house now,” Bessent said Tuesday at Southern Methodist University, referring more specifically to his department’s parallel maneuver to support the Japanese yen. “And you can bet against me if you want.”
In the case of the yen, Treasury stepped in to buy the currency so that the Bank of Japan wouldn’t sell its Treasurys. At $1.1 trillion, Japan is the largest foreign holder of U.S. debt, so a move to sell Treasurys likely would boost yields at a time when the domestic debt has soared past the $40 trillion mark and the deficit is headed past $2 trillion.
On the home front, Bessent announced last month that Treasury would buy back at least $4 billion of already-issued long debt, focusing specifically around 10- and 20-year notes. That is double the normal size of the buyback operations, and speculation is growing that the $4 billion level is a floor, not a ceiling.
“The size of the increase in bond-sector repurchases remains highly uncertain – and the odds of a larger increase are rising,” analysts at Wrightson ICAP said in a note earlier this week. “Something in the $5 billion to $6 billion range now seems likely to be the starting point for the discussion, and we cannot rule out something larger.”
Bessent’s comments represent an even starker warning to markets than previous comments, though the actual impact has been unclear.
The benchmark 10-year yield has risen about 10 basis points, or 0.1 percentage point, since the buyback announcement. Moreover, the 30-year bond yield has edged higher as well, though it has remained below the 5.3% level that BMO Capital Markets analyst Ian Lyngen said is a “proverbial line in the sand that was effectively established by Bessent.”
The secretary’s staunch position, though, has rattled some investors as heavy handed and potentially damaging to a market considered the deepest and most liquid in the world.
“Such a backdrop represents a departure from the Treasury’s history of being predictable and gradual to change course, although it appears to be the undeniable direction of Bessent’s leadership,” wrote Lyngen, BMO’s head of rates strategy. “Our concern is that it will have negative consequences for the credibility of Treasuries as an asset class.”
An announced buyback of $6 billion would be “fairly aggressive,” according to the Wrightson analysts. Going beyond that to tripling or quadrupling the normal level would be an “extreme case” that “result in a much more visible deceleration in the net supply trajectory.”
While the buyback level will be announced Wednesday, the actual operation won’t happen until Thursday. Markets will be watching both the offered amount as well as the demand from debt holders.
