Treasury’s smaller-than-expected buybacks fuel debate over aims

By Karen Brettell

Oct 1 (Reuters) – The US Treasury is purchasing fewer bonds than expected in its buybacks of longer-dated debt, even after recently expanding the program’s scope, stoking debate among investors over its aims and whether it is succeeding.

The program enables bondholders to offer specific securities to Treasury with the prices at which they are willing to sell. Treasury can repurchase up to its cap, raised last month to $6 billion from $2 billion, but it can also reject offers deemed too expensive.

In its most recent operations, the Treasury has accepted around half the bonds offered and in each case it has fallen short of its stated repurchase cap. At the same time, purchases have been concentrated in only a few issues.

Some portfolio managers and analysts have questioned why the government publicly increased the size of the program if it wasn’t going to buy as many bonds as it could, while others say it is doing what it promised.

The Treasury is “perfectly entitled to buy back less than they could if they don’t like the terms,” said Padhraic Garvey, regional head of research, Americas at ING, adding it “has always got the option to buy more.”

SUFFICIENT LIQUIDITY

Treasury Secretary Scott Bessent has cast the purchases as a technical measure to help investors trade older, less liquid government bonds.

If the program’s main job is to backstop liquidity, broadly defined as the capacity to buy and sell at current prices without moving the market, it seems to be working. Yields have risen in recent weeks but trading hasn’t been particularly difficult.

“If they really need the liquidity, they’ll give an aggressive offer in,” said Thomas Simons, chief US economist at Jefferies. Investors holding out for higher prices, he added, “don’t clearly need the liquidity that bad.”

The smaller acceptance rate may also reflect the program’s progress in removing older, less actively traded bonds from the market, with the remaining holders having little need to sell, or being reluctant to part with the securities.

Simons notes several earlier long-end buybacks attracted roughly $20 billion to $30 billion in submissions, compared with $10.47 billion at the most recent operation. The Treasury will buy up to another $6 billion in 10-to-20-year debt on Thursday.

“Over time, the least liquid dogs on the curve will eventually disappear from the market and then they don’t need to do as much liquidity support,” he said.

Many of the bonds targeted are low-coupon securities issued during the COVID-era period of extremely low interest rates. With market yields now much higher, those bonds have fallen substantially below face value and can be difficult to trade in size — and potentially cheap to repurchase.

That creates a possible debt-management rationale alongside the liquidity one, said John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors.

“If Bessent can buy back these bonds that were issued during COVID period and they’re pricing at 50 to 60 cents on the dollar … that seems like a great way to do it,” Tyner said.

Yet Treasury still has to finance the buybacks, potentially by issuing short-term bills at interest rates far higher than the coupons on the securities being retired.

CONFUSION OVER PROGRAM’S INTENT

The broader confusion over the program dates to its August 19 expansion, when Treasury said it would at least double buyback sizes for 10- to 30-year debt.

The announcement came two weeks after the quarterly refunding, the forum where investors have come to expect updates on borrowing and debt-management plans. The next quarterly refunding is set for the first week in November.

The unusual timing, combined with a sell off that was already pushing yields higher, encouraged investors to interpret the move as an effort to cap yields, Simons said.

“It was an out-of-cycle communication, something that was delivered with the timing that was not within their norms at all,” he said.

Long-end Treasury yields have kept climbing since the buyback was announced, but Garvey said that reflects the market pricing in a Federal Reserve that keeps rates higher for longer, not a failed operation.

The better gauge, he said, is the swap spread, a measure of how expensive Treasuries are against the private lending benchmark SOFR. That spread has narrowed, indicating that the operation is working according to Bessent’s aims, Garvey said.

“He’s narrowed the swap spread,” Garvey said. “That’s all he can do.”

(Reporting by Karen Brettell; Additional reporting by Caroline Valetkevitch; Editing by Colin Barr and Jonathan Spicer )