Markets will find out Wednesday how aggressive the Treasury’s bond-buying program will become, after Secretary Scott Bessent dared to challenge currency traders.
The department is scheduled to announce the size of the share buyback operation announced on August 19th at around 11 a.m. ET, an aggressive move that is part of a broader strategy to keep bond yields in check and ensure markets function as intended.
“Right now I’m the boss,” Bessent said Tuesday at Southern Methodist University, referring more specifically to the department’s parallel strategy to support the Japanese yen. “And you can bet on me if you want.”
In the case of the yen, the Ministry of Finance intervened and purchased the currency to prevent the Bank of Japan from selling government bonds. Japan is the largest foreign holder of U.S. Treasuries with $1.1 trillion, so any move to sell U.S. Treasuries is likely to push yields higher at a time when domestic debt has soared to more than $40 trillion and the deficit is on track to exceed $2 trillion.
On the domestic front, Mr. Bessent announced last month that the Treasury Department would buy back at least $4 billion in outstanding long-term debt, particularly 10-year and 20-year bonds. This is double the size of a typical share buyback operation, and there is growing speculation that the $4 billion level is a floor rather than a ceiling.
“The amount of increases in fixed income sector buybacks remains highly uncertain, and further expansion is increasingly likely,” analysts at Wrightson ICAP said in a note earlier this week. “Right now, something in the $5 billion to $6 billion range seems like a likely starting point for discussions, but something larger cannot be ruled out.”
Bessent’s comments serve as a more severe warning to the market than his previous statements, although the actual impact is unclear.
benchmark 10 year yield Shares have risen about 10 basis points (0.1 percentage point) since the share buyback announcement. What’s more, the 30-year bond yield has risen slightly, but remains below the 5.3% level that BMO Capital Markets analyst Ian Lingen describes as “the proverb in the sand that Mr. Bessent effectively established.”
But the governor’s tough stance has upset some investors, who say it is overbearing and could harm what is considered the world’s deepest and most liquid market.
“This backdrop represents a departure from Treasury’s history of predictable and gradual changes in direction, but that appears to be the unmistakable direction of the Bessent leadership,” said Lingen, head of interest rate strategy at BMO. “Our concern is that this will negatively impact the credibility of U.S. Treasuries as an asset class.”
The announced $6 billion share buyback is “quite aggressive,” Wrightson analysts said. Going beyond that to three or four times normal levels would be an “extreme case” and would “result in a significant deceleration in the net supply trajectory.”
Share buyback levels will be announced on Wednesday, but actual operations won’t take place until Thursday. The market will focus on both the amount on offer and demand from debtors.
