The federal government ran a $432 billion deficit in July, the fourth-highest monthly shortfall in its history. This week it announced it would start buying its own bonds back.
The Treasury said Wednesday it will at least double the maximum size of its long-end buyback operations, from $2 billion to at least $4 billion, covering the 10-year through 30-year sectors, beginning September 9. Long yields fell within hours.
The 30-year closed down 9 basis points at 5.196 percent, backing away from a level it had not touched since 2007. Total public debt outstanding, reported the same day, stood at $40.047 trillion.
The Treasury has no money of its own. Every dollar it spends was taxed or borrowed, and it is currently short more than $2 trillion a year. So the cash to retire a 30-year bond has to come from selling something else, and the something else is shorter. A TD Securities strategist told Axios this amounts to the Treasury's own small version of Operation Twist — the maneuver the Fed used in 2011 to push long rates down by changing the maturity of what it held. The debt does not shrink. Its maturity does.
And the amounts are almost nothing. The increase is $2 billion more per operation against roughly $5.5 trillion of 20- and 30-year bonds outstanding, which is four hundredths of one percent.
Thomas Simons, chief U.S. economist at Jefferies, told Reuters the announcement feels "shot from the hip." The yield did not move because $2 billion changed hands. It moved because the market took the announcement as a signal, and Bloomberg reported that Wall Street read it as Bessent reaching for the toolkit he has long said he had, toward a goal this administration states openly. Signals work for exactly as long as they are believed.
What it costs shows up at the other end of the curve. Treasury's own presentation to its borrowing advisory committee put bills — debt of a year or less — at 21.7 percent of marketable debt as of the end of April.
Every dollar sitting at the front end is a dollar that reprices at whatever the short rate is when it rolls. Minutes from the Fed's late-July meeting, released the same Wednesday, showed many officials believed tightening would likely be necessary if inflation did not come down. Interest is already the government's second-largest expense after Social Security, above $1 trillion a year, and 15 percent higher over the first ten months of this fiscal year than the last.
The $432 billion is what the government had to borrow. The $4 billion is what it will borrow in order to owe less of one particular kind. Nothing is repaid. The debt just moves closer to the front.
Every dollar sitting at the front end is a dollar that reprices at whatever the short rate is when it rolls.
