"Bessant leads a pea shooter into tank warfare," US Treasury repurchase agreements hit a wall, 10-year Treasury yield hits three-year high.

U.S. Treasury Secretary Bessen's move to significantly expand the scale of Treasury bond repurchases has met with resistance from the market.

On Wednesday, the Treasury announced it would raise the cap on single long-term Treasury bond repurchases to $6 billion, tripling the amount originally set last month, but this measure failed to curb the bond market sell-off. The 10-year Treasury yield hit a three-year high during the session, and the decline continued after the repurchase announcement.

Bessant had previously made lowering long-term yields a clear policy objective, but the current situation is contrary to that – high oil prices are exacerbating inflation concerns, market expectations for a Fed rate hike are rising, and the fiscal deficit is high. These multiple pressures are putting continuous downward pressure on yields.

The predicament in the bond market has directly impacted the real economy, with US mortgage rates rising to a more than one-year high .

The "deterrent effect" failed to materialize, and market prices rose even higher.

This expansion of the share buyback program stems from Bessant's recent public hints that the buyback program could exceed $4 billion, leading Wall Street to anticipate a single operation could reach $10 billion . In contrast, the $6 billion cap has disappointed the market.

"It's like the Treasury created a monster and now has to keep feeding it," said Steven Zeng, a strategist at Deutsche Bank. He pointed out that the $6 billion announcement failed to deliver the "shock effect" investors had hoped for.

Elias Haddad of Brown Brothers Harriman & Co. put it more bluntly: "For now, the Treasury is bringing a pea shooter to a tank war."

The market's calls for larger repurchase operations reflect the stubbornness of current long-term interest rates. Later on Wednesday, the U.S. Treasury auctioned $39 billion in 10-year Treasury notes at a yield of 4.834%, setting a new record for the highest yield on that maturity at auction.

Bessant admits he cannot control the "equilibrium" price of yields.

In response to the strong market reaction, Bessant himself admitted at an event in Texas on Tuesday that he could not change the "equilibrium" price of Treasury bonds, and his goal was only to slow down the pace of price fluctuations and prevent harmful narratives from becoming entrenched and spreading.

He attributed the rapid rise in long-term interest rates to market panic over the “US inability to repay its debts,” calling the fear “absurd, but at one point the dominant narrative.”

Against this backdrop, Bessant characterized the expanded repurchase program as a "Treasury Twist," drawing inspiration from the Federal Reserve's historical Operation Twist, which aimed to lower long-term borrowing costs. He also stated that repurchase operations help banks unload less liquid securities, thereby freeing up space for them to participate in new bond auctions.

In a client report, Evercore ISI economics director Krishna Guha and his team wrote that Wednesday's announcement "indicates that Bessant is accepting a limited role in repurchase operations" and that he "has likely realized that the U.S. cannot sustainably prevent fundamentals from dominating yield movements."

Lowering yields still requires multiple conditions to be met.

In a research report, Wells Fargo macro strategists Angelo Manolatos and Francis Brown pointed out that "other catalysts are needed to push long-term yields lower," and listed several possible conditions: slower growth and inflation, lower energy prices, reduced uncertainty surrounding Federal Reserve policy, fiscal consolidation, or a contraction in corporate bond issuance.

In terms of short-term policy signals, the Treasury Department said on Wednesday that the maximum size of each of the remaining six long-term nominal Treasury bond repurchase operations this fiscal quarter will be no less than $4 billion, consistent with the wording of the initial surprise announcement on August 19, without giving a clear signal of further expansion.

A Trump administration official, citing a Fox Business report, said the Treasury Department will routinely monitor the effectiveness of the repurchase operations and adjust the size as needed based on market conditions and liquidity requirements.

It is worth noting that the $6 billion figure is a cap rather than a fixed purchase amount. However, according to statistics, since the repurchase program was restarted in 2024, the Ministry of Finance has only failed to complete the full amount in two out of 52 long-term nominal treasury bond repurchases, and usually tends to purchase the maximum amount.

Zeng from Deutsche Bank also pointed out that the "final repurchase announcement" issued by the Ministry of Finance at 11:00 a.m. that day could replace the "preliminary announcement," and there was a possibility that the final actual purchase volume would exceed the upper limit.

Active intervention style sparks market controversy

The unexpected expansion announcement on August 19th, released outside the Treasury Department's quarterly routine announcement window, caught investors off guard and sparked discussions about a shift in the US debt management style towards a "more interventionist" approach, a stark contrast to the Treasury Department's long-standing principle of "regularity and predictability."

Many investors and analysts interpret this increased share buyback as an externalization of the Trump administration's anxiety about rising long-term borrowing costs ahead of the November congressional elections. With US Treasury yields continuing to rise, US mortgage rates have reached their highest level in over a year, directly impacting ordinary consumers.

In an interview with Newsmax on September 1, Bessant said, "I'm making sure there won't be any major, serious adverse consequences." But judging from the current performance of the bond market, this game with the market is far from over.

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