U.S. Treasury Secretary Scott Bessent’s announcement of active intervention in the Treasury bond market has sent Wall Street bond traders scrambling to predict the Treasury’s future strategy. They are busy crafting scenarios based on anticipated bond issuance directions and monitoring changes in bond prices and yields (interest rates). Bloomberg reported that Wall Street is conducting “war games” to prepare for potential shifts in the Treasury’s bond strategy.
The U.S. Treasury regularly announces its bond issuance plans four times a year and issues short- and long-term bonds accordingly. This consistent disclosure enhances market predictability and maintains stability in the Treasury market. However, just two weeks after the latest regular announcement, on August 19, Secretary Bessent unexpectedly stated that the Treasury would increase the scale of long-term bond buybacks from the initially planned $2 billion to over $4 billion, prompting a sensitive reaction from Wall Street. How are Wall Street experts anticipating the U.S. Treasury’s next moves?
Five Scenarios
According to Bloomberg and other foreign media, Deutsche Bank, Morgan Stanley, and Citigroup first expect the Treasury to reduce overall issuance of long-term bonds with maturities exceeding 10 years. This is the most direct and impactful policy tool available. They predict that when the Treasury makes its regular bond issuance announcement on November 4, it will unveil a strategy to increase issuance of medium- and short-term bonds (with maturities under 10 years) to fund the expanded buybacks of long-term bonds exceeding $4 billion. Secretary Bessent has not yet mentioned any additional announcements beyond the regular disclosure.
The second scenario involves eliminating 20-year bonds entirely to reduce long-term bond supply. The 20-year bond was introduced in 2020 by former Treasury Secretary Steve Mnuchin during U.S. President Donald Trump’s first term. While the 20-year bond has not gained significant market popularity, its yields have moved in line with the longer-dated 30-year bond. Jason Williams, head of U.S. bond investment strategy at Citigroup, stated, “We expect the Treasury to reduce the scale of 20-year bonds the most among long-term bonds, leading to higher prices for 20-year bonds,” adding, “We are recommending clients to buy them.”
The third scenario involves gradual small-scale interventions until the November regular announcement to mitigate market shock. By maintaining the current scale of long-term bond issuance while gradually increasing short-term bond issuance, the Treasury could lower the average interest rate in the $3 trillion U.S. Treasury market. The Treasury’s recent hint of potential changes in medium-term bond issuance (with maturities under 10 years) in its regular announcement supports this scenario.
The fourth scenario proposes delaying large-scale long-term bond auctions until 2028 or later. However, temporarily halting new long-term bond issuance could significantly impact the market, making this scenario unlikely. The Treasury previously suspended 30-year bond issuance in 2001 due to a fiscal surplus, but the current situation differs as the U.S. faces a large fiscal deficit.
The fifth scenario involves the Treasury using its $1 trillion general account funds to buy back long-term bonds. Since this would eliminate the need to issue short-term bonds to fund the buybacks, overall bond prices would rise and yields would decline.
“Interest Rate Adjustments Are Not Easy”
If Secretary Bessent succeeds in lowering interest rates through these methods, reduced international rates could alleviate pressure on South Korea to raise its own rates. However, experts believe the success of these strategies is unlikely. For instance, reducing 20-year bonds while increasing issuance of other maturities to shape the yield curve as desired is not straightforward. Furthermore, markets may perceive government manipulation of the bond market, leading to a decline in trust in U.S. Treasuries.
Critics also argue that irregular Treasury interventions could hinder the Federal Reserve’s price stability policies. Marco Kashiraki, a senior economist at Evercore, a New York investment bank, told The Motley Fool in an interview, “If the U.S. increases Treasury buybacks, the dollar’s value will eventually decline, driving inflation higher.”
Secretary Bessent has defended his buyback plan. In an interview with Reuters, he stated, “The surge in 30-year bond yields to their highest level in 19 years was disconnected from the economy’s fundamentals,” adding, “I do not believe Treasury interventions can alter equilibrium prices.” He also emphasized, “The U.S. economy continues to grow despite a large fiscal deficit,” and questioned, “I’m not sure where the confusion in the bond market is coming from.” However, critics argue that his unexpected remarks have introduced uncertainty into the market, as the Treasury’s buybacks have traditionally been conducted through regular, predictable announcements.
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