U.S. Treasury doubles long-bond buyback size

The U.S.

Treasury is stepping into one of the most fragile corners of the bond market just as long-term yields approach levels last seen nearly two decades ago.

The timing is hard to ignore.

On Wednesday, the Treasury announced it will at least double the maximum size of its liquidity-support buybacks for long-dated bonds, from $2 billion to at least $4 billion per operation.

The change takes effect Sept.

9 and runs through Nov.

4, the date of the next quarterly refunding.

Yields fell immediately, exactly where the announcement pointed.

The 30-year yield dropped 7.8 basis points to 5.207% by 9 a.m.

ET.

The 10-year slipped 4.9 basis points to 4.65%.

The iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT ), which closed Tuesday at $81.66, hitting the lowest levels since June 2004, traded 1.3% higher before the open.

The iShares 10-20 Year Treasury Bond ETF (NYSE: TLH ) gained 1%.

Here’s what this buyback move really means for the Treasury market.

Chart: Treasury Yields Tumble As Washington Announces Buyback Program Treasury Is Buying Where The Market Is Under Pressure The move targets two specific parts of the Treasury curve: bonds maturing in 10 to 20 years and those maturing in 20 to 30 years.

Treasury said the larger operations reflect its desire to provide greater liquidity support in these sectors.

It also pointed to the "significant volume of high-quality offers" it routinely receives during long-end buybacks.

The announcement comes after the 30-year Treasury yield climbed to 5.327% on Tuesday, its highest level since June 2007.

The 10-year yield also reached 4.747%.

Earlier this week, the iShares 20+ Year Treasury Bond ETF had fallen to its lowest levels since June 2004.

Read Also: The US Treasury Market Hasn't Been This Cheap in Decades: Here's Why What A Buyback Actually Does Treasury buybacks are not new, and they are not stimulus.

The government offers to repurchase older bonds that trade less actively than freshly issued ones, and dealers submit the paper they no longer want to hold.

The money to do that has to come from somewhere, and it comes from the same borrowing program that funds everything else, which leans heavily on short-term Treasury bills.

So the net effect is a swap.

Fewer very long bonds sitting in private portfolios, more short-term paper.

The Buyback Can Help Liquidity, But It Cannot Fix The Deficit This is where investors need to separate two very different ideas.

Treasury buybacks can improve market liquidity.

They can provide investors with a more predictable exit for older securities and potentially reduce some of the price dislocations that occur during periods of stress.

They cannot solve the underlying supply problem.

Why The Long End Broke First Last Thursday’s $25 billion 30-year auction cleared at 5.216%, the highest auction yield for that maturity since 2001, and it tailed by four-tenths of a basis point.

The 10-year sale a day earlier drew the highest financing cost at that tenor since 2007.

Behind those auctions is the harsh arithmetic of the Treasury’s balance sheet.

July’s federal deficit hit $432.3 billion, the largest monthly shortfall since March 2021, pushing the fiscal-year total near $1.8 trillion.

Interest on the debt has already crossed $1.1 trillion this year.

Consumer prices rose 3.4% in July, well above the Fed’s 2% target, with the Strait of Hormuz still constraining oil flows.

Foreign holdings of Treasuries fell in June, with the United Kingdom, China, and Japan all trimming.