Treasury buybacks showed limited success in slowing rising long-term yields after the Treasury doubled its purchase limit to $4 billion an operation in September, Federal Reserve Bank of St. Louis researchers said.
The purchases appeared to improve trading in older bonds without reversing a broader decline in the benefits investors attach to government debt, the researchers said. The bank published their analysis, “Treasury Buybacks and the Convenience Yield,” in its On the Economy series on Nov. 12.
Paulina Restrepo-Echavarría, an economist and senior economic policy advisor at the bank, and research associate Bontu Ankit Patro examined market responses through Oct. 1. They completed the analysis before the Treasury's Nov. 4 quarterly announcement of its borrowing plans.
The authors found no immediate visible reversal in measures of the convenience yield, the extra value investors place on Treasuries for their safety and tradability, around September's buyback expansion. Yields on 10-, 20- and 30-year Treasuries continued rising despite the larger purchases.
The Treasury raised the maximum size of purchases supporting trading in longer-term debt from $2 billion to $4 billion an operation beginning Sept. 9, the authors said. Separately, the Treasury said in its Aug. 5 announcement that it expected to buy $38 billion of older securities for cash management through October.
Buybacks chiefly target older bonds that can be harder to trade than newly issued securities, the authors said. Removing some of those bonds can make trading easier and reduce the extra return investors demand for holding debt that is harder to sell.
The authors said investors historically accepted lower returns on Treasuries than on comparable assets because government debt trades readily, serves as collateral and offers safety during market stress. That advantage lowers government borrowing costs, but researchers must estimate its size because markets do not quote it directly.
One measure compares yields on Moody's Aaa corporate bonds with Treasury yields, the authors said. The gap narrowed from the early 2010s, when it exceeded 1.4 percentage points for much of the period, indicating a smaller relative benefit from holding Treasuries.
A second measure compares government bond yields with rates on swaps of matching maturities, the authors said. It showed little change in the benefit attached to one-year Treasury bills in recent years, but declining benefits at longer maturities.
The authors said buybacks appeared to work within their intended scope, while broader forces included higher expected short-term rates and greater compensation for holding longer-term debt. Purchases could improve trading without materially lowering benchmark yields and were unlikely to offset pressures arising elsewhere.
The analysis represents the authors' views, which do not necessarily reflect those of the bank or the Federal Reserve System.
