Treasury to Announce Buyback Size on September 9... Wall Street on Edge Ahead of Auction

Market Expectations Are $5–6 Billion
A $4 Billion Buyback—Only Double—May Disappoint
Both Large and Small Amounts Carry Risks

The U.S. Department of the Treasury will publicly announce the size of its first long-term Treasury bond buyback (early redemption) since revealing plans to expand the program. As the announcement comes ahead of scheduled auctions for 10-year and 30-year Treasuries, there is growing concern in the market that if the buyback falls short of expectations, it could trigger further selling of government bonds and a subsequent rise in yields.

Scott Bessent, U.S. Secretary of the Treasury. Photo by Dongjoo Yoon

According to Bloomberg News on September 8 (local time), the U.S. Treasury plans to announce at around 11 a.m. on September 9 the size of the buyback for 10- to 20-year-maturity Treasuries that will take place the following day. This is the first such operation since last month's announcement on August 19, when the Treasury stated it would expand the size of each long-term buyback from the previous $2 billion per operation to "at least double" that amount.

U.S. Secretary of the Treasury Scott Bessent did not specify the precise amount for the buyback to be implemented on September 10. However, he explained that the expansion of the buyback program is "a measure intended to cool the heat that has built up in the Treasury market." His comments imply that the move is aimed at addressing the fact that long-term Treasury yields last month soared to their highest level in 19 years.

The market expects the Treasury to buy more than $4 billion worth of government bonds. However, Bloomberg reported that if the amount is limited to $4 billion, disappointment could lead to additional selling and higher yields, especially since the 10-year Treasury yield—which serves as a benchmark for mortgage rates—is now sitting at a higher level than it was last month.

On the other hand, setting the buyback amount too high is also a concern. Morgan Stanley analyzed that $10 billion per operation would be a realistic limit, considering the Treasury's available funding. This is because, if the initial buyback is set at a significantly high figure, it may shape market expectations for similar sizes in subsequent long-term buybacks as well.

Lou Crandall, Chief Economist at Wrightson ICAP, pointed out, "If the buyback size is greatly expanded, it would effectively be an admission that the Treasury rushed out its August 19 announcement without adequate review." He predicted that the initial buyback amount is likely to be in the range of $5 billion to $6 billion.

The size of the buyback will be announced just a few hours before the Treasury's 10-year bond auction. The following day, the 30-year bond auction and the actual buyback will be carried out. Bloomberg noted that if the announced buyback diverges from market expectations, it could affect auction demand as well as long-term yields.

Another area of interest is whether the Treasury will comment specifically on how it will fund the buyback program. While the Treasury stated last month that it would release a provisional buyback schedule at a later date, it did not explain how the buyback would be financed.

The market is discussing the possibilities that the Treasury could increase issuance of short-term bills with maturities of less than one year, or utilize the cash balance in the Treasury General Account (TGA). Morgan Stanley has particularly noted that if TGA funds are used, the size of each buyback will likely be limited to around $10 billion due to funding constraints.

Meanwhile, the Treasury's expansion of long-term bond buybacks is being regarded as an active intervention in the market, in contrast with the existing "regular and predictable" principles of Treasury management. This is because, after the 30-year Treasury yield spiked to the highest level since 2007 last month, the Treasury made a surprise announcement to expand buybacks—regardless of its usual scheduled quarterly financing plans.

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