US Market: Treasury bond purchases fall below $6 billion buyback cap

The U.S. Treasury is purchasing fewer bonds than the maximum allowed under its buyback program, even after expanding it, prompting investors to debate whether it is achieving its intended purpose, Reuters reported.

Under the program, bondholders can offer specific Treasury securities at prices they are willing to accept. The Treasury can purchase up to a predetermined limit but may reject offers it considers too high.

In its most recent operations, the Treasury accepted roughly half of the bonds submitted and fell short of its stated repurchase limit in each case, according to Reuters. Purchases have also been concentrated in a relatively small number of individual securities.


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Last month, the Treasury increased the maximum size of the buybacks to $6 billion from $2 billion, covering longer-dated debt. The expansion has led some portfolio managers and analysts to question why the government raised the limits if it did not intend to use the additional capacity.

Others argue that the Treasury is simply exercising its discretion to avoid buying bonds at prices it considers unattractive. Reuters reported that the Treasury retains the option to purchase more securities if the terms offered by investors become more favourable.

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Liquidity remains a key focus
Treasury Secretary Scott Bessent has described the buybacks as primarily a technical measure intended to improve trading conditions for older, less liquid government bonds.

By that measure, the program appears to be functioning, even as Treasury yields have risen in recent weeks. Trading in the market has not shown signs of significant disruption, suggesting that investors requiring liquidity can still transact without substantial price concessions, Reuters reported.

The lower acceptance rate could also indicate that the Treasury has already removed some of the least liquid securities from the market. Investors still holding the remaining bonds may have less incentive to sell or may be unwilling to accept the government's offered prices.

Earlier buyback operations for longer-dated debt attracted roughly $20 billion to $30 billion in submissions, compared with $10.47 billion in the most recent operation, Reuters reported. The Treasury is scheduled to offer another buyback of up to $6 billion in 10-to-20-year debt on Thursday.

The securities targeted by the program include many low-coupon bonds issued during the COVID-19 pandemic, when interest rates were near historic lows. With market yields now substantially higher, those bonds trade well below their face value and can be difficult to transact in large volumes.

Potential debt-management benefit
The buybacks could also serve a broader debt-management purpose by allowing the Treasury to retire older securities trading at significant discounts to face value.

John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors, said the government could potentially benefit from repurchasing pandemic-era bonds trading at steep discounts, Reuters reported.

However, the Treasury must still finance the buybacks, potentially by issuing short-term Treasury bills with interest rates considerably higher than the coupons on some of the bonds being retired.

That means the financial benefit of retiring discounted long-term debt must be weighed against the cost of issuing replacement debt.

Timing fuels questions over objectives

Uncertainty about the program's broader purpose intensified after the Treasury announced an expansion on August 19, when it said it would at least double the size of buybacks for debt with maturities of 10 to 30 years.

The announcement came outside the normal quarterly refunding schedule, when investors typically receive updates on Treasury borrowing and debt-management plans. The next quarterly refunding is scheduled for the first week of November.

The timing of the announcement, coupled with a bond-market selloff already pushing longer-term yields higher, led some investors to interpret the move as an attempt to contain rising borrowing costs, Reuters reported.

Long-term Treasury yields have continued to rise since the expansion was announced. Analysts cited by Reuters, however, said the move in yields largely reflects expectations that the Federal Reserve could keep interest rates elevated for longer rather than indicating that the buyback program has failed.

Another measure investors are watching is the swap spread, which compares Treasury yields with rates in the private lending market benchmarked to the Secured Overnight Financing Rate, or SOFR.

Reuters reported that the narrowing of swap spreads suggests the buyback program may be improving the relative functioning of the Treasury market, even if it is not being used to its full stated capacity.

The debate therefore centers less on whether the Treasury can buy more bonds and more on how much it should pay for them, and whether the program's primary objective is market liquidity, debt management or a combination of the two.


(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)