Continuous “intimidation” of U.S. Treasury shorts! Are “Bessent put options” starting to take effect?

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U.S. Treasury Secretary Yellen's plan to significantly expand long-term Treasury buybacks is reshaping the landscape of the interest rate market, and traders are increasingly reluctant to short the long end of the Treasury curve.

Since Yellen announced last week that the scale of long-term Treasury buybacks would "at least double," Treasuries have consistently outperformed interest rate swaps of similar duration. The 30-year swap spread has narrowed to its lowest level since February, and benchmark Treasury yields have trended lower after initial volatility. On Monday, CNBC reported that the Treasury Department might use funds from its General Account at the Federal Reserve (TGA) to finance these buybacks, further boosting market sentiment.

According to a Bloomberg report on Wednesday, Jason Williams, head of U.S. rate strategy at Citi, said, this new Treasury Department "put option" offers potential downside support, improving the asymmetric return profile of holding long-end bonds. He noted that Yellen's recent series of measures—including ramping up buybacks and intervening in the yen exchange rate—"all indicate someone who is willing to do whatever it takes to achieve their goals."

Swap spreads narrow, market prices in the "Yellen put"

Swap spreads are an important indicator of bond supply and demand conditions. In recent years, as global government bond supply has surged, the spread between Treasury yields and swap rates has continued to widen, attracting large-scale hedge fund bets on the direction of swap spreads. Federal Reserve researchers estimate that related positions surged from less than $50 billion in 2022 to a record $305 billion last year.

Yellen’s plan to expand buybacks has brought a phase shift to this situation. The 30-year swap spread has narrowed to its lowest since February this year; the 10-year swap spread has also contracted by about 3 basis points to about 38 basis points.

Padhraic Garvey, head of research at ING Groep NV in New York, said, the narrowing swap spread reflects market expectations that "future buyback sizes may continue to expand."

Short squeeze signals emerge in options market

Structural changes in the options market also corroborate the existence of the "Yellen put." Over the past week, the U.S. Treasury futures options market has seen a marked bullish tilt—contracts tracking long-term Treasuries saw call option prices surge relative to puts; meanwhile, the skew of short-term Treasury futures remained near neutral levels seen in recent months—a striking contrast.

Alex Manzara, of derivatives brokerage R.J. O'Brien & Associates, said: "The current ‘trading theme’ is focused on the long end, and the market’s ‘fear’—if we can call it that—is that long-term rates could fall sharply due to intervention."

In the SOFR options market, open interest for the Sep26, Dec26, and Mar27 contracts surged at the 96.0625 strike price, concentrating in Sep26 and Dec26 puts. Meanwhile, at the four strike prices with the largest open interest, Sep26 and Dec26 calls have more than twice the open interest of puts.

Structural pressures remain, long-end yields still high

Despite positive market reactions, several market participants warn that Yellen's intervention has not fundamentally changed the supply-demand structure of Treasuries.

The 10-year Treasury yield remains above 4.6%, near its highest level since early 2025; 30-year yields are around 5.2%, near highs not seen since 2007.

Libby Cantrill, head of public policy at Pimco, pointed out: "Conducting buybacks at the long end of the yield curve may technically push yields lower, but the fundamental drivers of higher Treasury yields—namely the continued expansion of the U.S. structural fiscal deficit and the resulting need for massive debt issuance—will not change in the short term."

Billionaire investor Stanley Druckenmiller has also publicly criticized Yellen's intervention as a mistake.

Investor positioning has also become more divided. According to JPMorgan’s U.S. Treasury client survey on August 24, both long and short positions among investors have increased, while neutral positions have dropped to 54%, the lowest since May 26, down from 67% previously. This growing divergence reflects disagreements over the effectiveness of the "Yellen put": some traders are following the trend by going long the long end, while others are still betting on a structural uptrend in yields.

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