Wall Street, still absorbing U.S. Treasury Secretary Scott Bessent's buyback of government bonds in August, is bracing for another intervention by the Treasury Department next month.
Major Treasury dealers were set to receive survey questions from the department on the 16th ahead of the quarterly refunding announcement, Bloomberg reported on the 15th. The department will release its quarterly debt issuance plan on Nov. 4. Market participants say the wording of the survey questions will offer a rough read on the direction Bessent has in mind.
Citigroup said the questions could signal the possibility of reduced issuance of long-dated debt. Bessent could cut or eliminate sales of 20-year Treasuries, citing weak demand for long-dated bonds from pension funds, the bank said.
Long-dated debt lets the government lock in funding for extended periods or fix borrowing costs on existing debt for years. But oil prices remain elevated because of the war with Iran, and Big Tech companies in artificial intelligence are borrowing heavily, competing with government bonds for capital. Against that backdrop, any increase in supply would only accelerate upward pressure on yields.
The Treasury earlier surprised markets by announcing it would double its buyback program to $4 billion (about 5.33 trillion won) as concerns over U.S. fundamentals kept pushing long-term yields higher. A buyback is a move in which the Treasury uses cash on hand or proceeds from debt sales to purchase bonds that are near maturity or were issued years ago. It reduces the volume of debt circulating in the market, supporting prices and easing upward pressure on yields. Buying up bonds that have become thinly traded can also improve market liquidity.
With the annual interest bill on U.S. government debt topping $1 trillion (about 1,331 trillion won) for the first time, the move is seen as an effort to contain borrowing costs that are surging alongside a ballooning national debt and rising long-term yields.
The approach has been dubbed a "Treasury Twist," a version of the Federal Reserve's Operation Twist, in which the central bank sells short-dated bonds and buys long-dated ones. The problem is that the Treasury's intervention has introduced a kind of uncertainty markets had not seen before, complicating their scenarios.
Bloomberg noted that the measure "really did work at first," but added that Bessent, through the intervention, had upended the "regular and predictable" policy framework the Treasury had maintained for decades.
In its August issuance plan, the Treasury revised its language to indicate it could consider not only "increases" in sales of Treasuries and floating-rate notes but also "changes" to them. Markets read that as a signal leaving the door open to smaller sales of long-dated debt. That has fueled talk that the department could trim supply of 20-year and 30-year bonds.
Cutting auctions of long-dated debt would require filling the gap with short-dated issuance. Bloomberg also raised the possibility of selling one-year floating-rate notes tied to the Secured Overnight Financing Rate (SOFR). That would mean the government issues one-year paper whose interest is not fixed but moves with ultra-short-term market rates.
There are risks, however, given that short-dated debt already accounts for more than 22% of total government borrowing. Because it matures quickly, short-dated paper brings heavier rollover pressure, and rising rates feed through to costs faster. "The Treasury needs to be much more predictable," said Vishal Khanduja, a portfolio manager at Morgan Stanley Investment Management. "Given the amount of debt the Treasury has to issue, the last thing you want to do is upset buyers and make policy harder to predict."