Is the U.S. Losing Control of its Bond Market?

The US Treasury just made a very unusual move with America's long-term borrowing costs approaching levels we haven't seen in decades. The 10-year treasury at 4.8%, the 20 and the 30-year at 5.2%. Scott Besson announced that the government will at least double the size of its buyback program for long-term US debts, long-term US treasuries between 10 and 30 years. And that's a little bit curious. Officially, Scott Besson says this has nothing to do with manipulating bond yields or lowering interest rates. It's simply about improving liquidity in the treasury market. But interestingly, Wall Street isn't entirely buying that explanation because these purchases come at a very convenient time. America's debt has surged beyond $40 trillion. They're heavily in deficit, interest costs are exploiting, and investors are demanding increasingly high yields to lend the government money. So what exactly is going on here? Is this really just routine maintenance of the bond market? Or is the US government now quietly trying to push down interest rates, a job that traditionally has been handled by the independent Federal Reserve? Also, before we get started, quick shout out, the live free three-day investing workshop with myself and Phil Town is happening this weekend. If you haven't secured your ticket yet, please do. I would love to see you guys there. Details in the description, the pinned comment. All right, the treasury. This is honestly a very interesting story. But I first want to set the scene a little bit. So we all know that the US is in a horrific amount of debt. In fact, it's now over $40 trillion. And the reason this keeps getting worse is that the US is stuck in a deficit, right? The government spends way more each year than it collects. So it has to borrow to cover the shortfall. It does this by selling treasury bonds. These are essentially IOUs issued by the US government. You lend Washington money today, and in return, the government promises to pay you back with a return. Now, there are all sorts of different government bonds you can buy with varying interest rates. For example, the three-month T-bill will give you around a 3.85% annual yield at the time of recording, whereas the 30-year treasury will give you around a 5.2% annual yield. You know, that makes sense. If I'm lending the government my money for 30 years instead of three months, I'm taking a lot more risk around inflation and interest rates. So I'm going to want to be compensated for it. And right now, investors are demanding a lot of compensation. For example, the 10-year treasury bond, which dictates things like 30-year mortgage rates, has risen from 0.5% in 2020 to now 4.8% in 2026. And this is the highest we've seen these rates in literally decades. But this is obviously bad for the US government, who has to pay that interest rate on their newly issued long-term bonds. In 2020, they barely had to pay out any interest on the new 10-year bonds. Now, they have to pay a whopping 4.8%. And here's where that problem compounds. The US doesn't just have to finance each year's new deficit. It, of course, also has the trillions of dollars of existing debt that's constantly maturing. And governments will normally just refinance that debt by, you guessed it, issuing new treasuries. But today, a lot of that debt that was originally issued when rates were extremely low is being replaced with debt carrying much higher interest rates. And this chart here is the perfect representation of what's happened to the average interest rate on all US debt and the massive lump sum of interest that needs to be paid back on it over time. In 2020, the average interest rate was 1.77%. Today, it's 3.49%. And with old debts being refinanced at these higher rates across the board, plus new debts being taken on thanks to the deficit, this means that the country's annual interest payments have ballooned from $523 billion to around $1.3 trillion. As you can see, this is a painful spot for the US government to be in. It smells like a little bit of a debt trap, and investors are demanding high rates of return to be buyers of long-term US treasuries. There are a few reasons for this, but they really boil down to inflation, supply, and uncertainty. You know, on the inflation front, inflation had been pretty stable up until the start of this year. But this year, it has started rising again. Basically, two core reasons, an energy shock driven by fuel prices, and also tariffs. Are some of America's policies contributing to its own inflation problem? Ironically, yes. And what does it mean? Well, investors buying longer dated treasury bonds demand a much higher interest rate to compensate for the risk of higher ongoing inflation. Then the second reason is uncertainty. So because the US government is also issuing an enormous amount of debt, every year it needs to find buyers for those trillions of dollars of treasury. So, with more and more treasuries flooding the market, increasingly those buyers are saying, you know, this is getting pretty rough. If you want me to absorb all of this debt, you're going to have to pay me more for the risk. You're selling trillions in bonds. I have no idea what inflation will average over the next 30 years. I have no idea how big America's deficits will become. No idea how much more debt Washington will issue. No idea what happens to the dollar or to interest rates. So, I want to be well paid to take on your debt. So, uncertainty drives up yields. And that's really annoying for the US government because investors are demanding higher yields at precisely the moment the government can least afford them. They want the interest rates to fall, right? But what if the US government could manipulate interest rates? What if they could get the interest rate on those long-term bonds down a little bit? Hmm, that would be very beneficial for them. Problem is, that power rests mostly in the hands of the Federal Reserve, which is independent of the US government. AKA, even though Trump may try, he can't influence their decision on interest rates. But is there a way the US government itself could bring down interest rates on long-term bonds? Well, that is what the market believes Scott Besson is currently trying to do with his newly expanded buyback program. So, what is he actually doing? Well, first, we need to understand what a treasury buyback actually is. Normally, the US treasury is in the market selling government debt, they're selling the bonds to try and raise some cash. With a buyback, it does the opposite, it goes back into the market and purchases some of the debt it previously issued. Now, the treasury actually restarted regular buybacks back in May 2024. But what's changed now is the size of the purchases they're willing to make at the long end of the market. Previously, treasury would buy up to $2 billion per operation in treasuries with between 10 and 30 years remaining. But starting September 9th, that has now increased to at least $4 billion per operation. So, they've at least doubled the size of these long-term purchases. Confused? Why would they be buyers and sellers of the exact same bond? Well, here's the thing, treasury is not going into the market and buying the brand new 30-year bonds that's just issued, right? That doesn't really make sense. What they're doing is they're buying back older treasuries, what's known as off-the-run securities. So, imagine the government issued a 30-year treasury bond five years ago. Well, today that bond has 25 years remaining, right? And in the meantime, the government has issued newer 30-year bonds. So, that old bond is no longer the benchmark 30-year treasury. It's now off the run. And because investors generally prefer trading the newest benchmark securities, these older bonds can be less liquid. In fact, before this latest announcement, the treasury was already planning to buy up to $38 billion of these off-the-run securities across different maturities this quarter. And that's important because the treasury says that liquidity is the entire reason it's doing this whole thing. By periodically offering to buy some of the older bonds back, treasury gives holders another way to sell them so they can free up their balance sheets and use that money elsewhere. So, in theory, that helps the treasury market function more smoothly. And this is what Scott Besant keeps saying. We're trying to signal that we think that this is a thinly traded area of the market, that we're in August, and there's been a lot of corporate issuance that's influenced the market. And we believe that there are many underlying factors that the market is not looking at. And we are going to make a market in these. We routinely do buybacks. So, we're going to increase the size of the buyback. And, you know, Sarah, I would note that it could be more than the $4 billion per issue. So, this all sounds pretty reasonable, right? Besant says he isn't trying to manipulate interest rates. The treasury has been doing these buybacks since before he announced this expansion. You know, they're targeting older and less liquid securities. And there is a legitimate argument that this helps the treasury market function more efficiently. But there's one fairly obvious problem with that explanation. Regardless of why the treasury is buying long-term bonds, we know what happens when you introduce more demand into a market. Prices go up. And with bonds, when the prices go up, the yields go down. And this is where some investors are getting a little bit more skeptical. The theory is that the treasury actually wants to increase the size of these buybacks because doing so creates additional demand for long-term treasuries, pushing their prices higher and thus their yields lower. And we actually saw yields fall around this announcement. The 30-year yield had reached about 5.34%. So, it's the highest level since 2007. But following the treasury's announcement, it fell to around 5.18%. Now, why would the treasury care? Well, if the market yield on a 30-year treasury falls from, say, 5.3% to 4.8%, the next time the treasury issues new 30-year debt, the rate investor's demand should broadly reflect that lower prevailing market yield. So, future borrowing becomes cheaper than it otherwise would have been. And for a government with $40 trillion of debt and an exploding interest bill, you can understand why some investors might question whether improving liquidity is the only thing on the treasury's mind. But this raises another pretty obvious question. Where does the treasury get the money to buy back its own bonds? It can't just create money. Ultimately, the treasury still has to finance the government through taxes, its existing cash balance, or by issuing other debts. So, if the treasury buys back long-term bonds while it still needs that money to actually fund the government, you guessed it, it may have to finance that by issuing more short-term treasury bills. So, that's the other thing to talk about. This isn't quantitative easing. When the Federal Reserve conducts quantitative easing, the Fed literally creates new reserves and then uses them to buy bonds. So, it expands its balance sheet in the process. But the treasury can't do that. If the treasury buys $4 billion of long-term bonds, it hasn't magically made $4 billion of government debt disappear. It has to get that money from somewhere. And it may need to borrow it. So, if the treasury issues, say, $4 billion of short-term bills and uses that money to buy back $4 billion of long-term bonds, the total amount of government debt hasn't changed, but the type of debt held by investors has. There are now more short-term treasuries in the market and fewer long-term treasuries. So, what's the effect? Well, if you reduce the supply of the long-term bonds by buying some of them back, you put downward pressure on yields. But remember, the treasury doesn't simply get to decide that the interest rate on a 30-year bond is, say, 3%. Remember, it's an auction system. It auctions that debt to investors. And ultimately, the market determines the yield required to get enough people to buy it. If investors become worried about inflation or deficits or rising debt or simply the enormous amount of treasury supply they're being asked to absorb, they will demand a better return. And these people are sometimes called bond vigilantes. If they start winning the tug of war, bond prices fall and yields rise. And that's why the buybacks have become so interesting. The skeptical interpretation is that the bond vigilantes are pushing long-term yields higher and Besson is now pushing in the opposite direction. By buying long-term bonds and potentially shifting more government debt towards the short end, the treasury creates additional demand and reduces some of the long-term debt that the private market has to absorb. So, this isn't the treasury versus the Federal Reserve. It's actually the treasury versus the bond market. Investors are demanding higher long-term yields to finance America's enormous borrowing requirements while treasury is taking actions that can push those same yields in the opposite direction. And that brings us to the big question. Can Besson actually win that fight? Well, the truth is probably not. The biggest problem is simply scale. The treasury has increased these long-term buybacks from $2 billion to at least $4 billion per operation. But the treasury market is worth more than $30 trillion. In fact, there are trillions of dollars of 20 and 30-year treasuries alone. So, a few billion dollars of additional buying, okay, maybe it might move yields at the margin, but it is nowhere near enough to overpower the bond market if investors genuinely want higher returns. And then more importantly, we also shouldn't forget to mention that none of this actually fixes the reasons that investors are demanding high yields in the first place. The US is still running enormous deficits. The debt is still above $40 trillion. Inflation remains a concern. Interest costs are still rising. And the treasury still needs to find buyers for trillions of dollars of debt. So, I think the really important question isn't whether these $4 billion buybacks can control long-term interest rates because I don't think they can. It's what happens if yields keep rising anyway. What happens if investors really start losing confidence? Hopefully, it doesn't get to that point. But anyway, that is the story of the US treasury meddling around in the bond market and what you've been seeing recently in the news. A reminder too before I close out the video, if you want to come along to the Rule 1 New Money Workshop, that is happening this Friday, Saturday, and Sunday. Please get your free ticket, lock in some accommodation, and I hope to see you in the flesh for three days here in Atlanta. I'm currently in Phil's studio recording. So, come on over. It's a great three days. I hope to see you there. But with that said, leave a like if you did enjoy, subscribe if you'd like to see more, and I'll see you guys in the next video.