US Treasury Bond Buybacks Fall Short Despite Expanded $6 Billion Cap

The US Treasury is buying fewer long-dated government bonds than investors expected under its expanded buyback program, prompting debate over the initiative’s purpose and effectiveness.

Treasury last month raised the maximum size of certain buybacks to $6 billion from $2 billion. Bondholders can submit securities and specify the prices at which they are willing to sell, while Treasury retains the right to reject offers it considers too expensive.

Recent operations have accepted roughly half of submitted bonds and remained below the $6 billion ceiling, with purchases concentrated in a limited number of securities. The pattern has raised questions among investors about why Treasury increased the program’s capacity without fully using it.

Padhraic Garvey, ING’s regional head of research for the Americas, said Treasury is entitled to purchase less when sellers’ terms are unattractive and retains the flexibility to increase purchases when necessary.

Treasury Secretary Scott Bessent has described the buybacks primarily as a liquidity tool aimed at improving trading in older, less-liquid government debt. Despite rising Treasury yields in recent weeks, market liquidity has remained relatively stable.

Thomas Simons, chief US economist at Jefferies, said investors demanding higher prices may simply have little need for liquidity. Previous long-end operations attracted about $20 billion to $30 billion in submissions, compared with $10.47 billion during the latest buyback.

Many targeted securities are low-coupon bonds issued during the COVID-era period of exceptionally low interest rates. Higher current yields have pushed their prices well below face value, creating a potential opportunity for Treasury to retire older debt at substantial discounts.

However, the government must finance those purchases, potentially through short-term Treasury bills carrying much higher interest rates.

Confusion intensified after Treasury announced the expansion on August 19, outside its normal quarterly refunding schedule and during a bond-market selloff. Some investors interpreted the move as an attempt to restrain long-term yields.

Garvey argued rising yields instead reflect expectations that the Federal Reserve will maintain higher interest rates for longer. He pointed to narrowing Treasury swap spreads as evidence that the buyback program is achieving Bessent’s stated goal of improving market functioning.