The Treasury Can’t Buy Its Way to Lower Rates

Kian Nolan

(Photo of Albert Gallatin Statue, U.S. Department of the Treasury)

On August 19^th, outside of regular quarterly refunding announcements, the U.S. Treasury surprised investors by announcing that it would at least double the maximum size of its long-term bond buyback operations, and it has since tripled them to $6 billion. This unscheduled announcement was unnecessary, and whatever the Treasury intended, expanded buybacks will not lower long-term borrowing costs, because those costs reflect inflation, Federal Reserve policy, and the debt itself. The Treasury puts its own credibility at risk by blurring liquidity support with yield management. Instead, the Treasury needs to resume a calendar-based program with no surprises, and Congress should take serious and credible steps to address the deficit.  

The Treasury resumed buyback operations more than two years ago to smooth seasonal swings in its cash balance and support liquidity. The operations retire older, illiquid Treasuries through scheduled buybacks (no surprises) funded by Treasury bills, which are short-term debt that mature in four weeks to one year. The buyback expansion for 10-to-30-year Treasuries came just after the 30-year Treasury yield hit a 19-year high of 5.31%, alluding to the fact that price management, not liquidity management, was a primary concern. 

Treasury Secretary Scott Bessent said the move was meant to address liquidity problems in the 30-year market. In a House hearing on September 15^th, Bessent remarked that although the Treasury does not “set the equilibrium price,” his job is to “move it back toward equilibrium” whenever he believes “they have moved too far away,” reflecting Bessent’s belief that “yields don’t reflect the underlying fundamentals.” Investor Stanley Druckenmiller, a former mentor to Bessent, argued that strong sponsorship, no failed auctions, no dealer balance-sheet seizure, contained volatility, and orderly trading in markets suggested no liquidity problems in Treasury markets. The Treasury Borrowing Advisory Committee (TBAC) previously recommended larger buyback operations for long-term debt in 2025, but it argued the Treasury should stay regular and predictable by announcing buyback guidance at its quarterly refunding. Any strain in August should have been addressed there, not in a surprise announcement with a hint of open-ended buyback growth. Such announcements suggest a Treasury that will step in whenever it is unsatisfied with yields, setting a dangerous precedent and adding unnecessary unpredictability to an institution that has long been a pillar of stability.  

Contrary to Bessent’s August belief that “yields don’t reflect the underlying fundamentals,” analysts have been shifting their expectations of future yields upwards. A Wall Street Journal survey of 71 analysts found that they now expect the 10-year yield to end 2026 at 5.1%, up from 4.4% in July. Importantly, they also expect higher yields to persist, at 4.96% by mid-2027 and at 4.78% by the end of 2027, up from 4.3% and 4.26% in July.  

Either the market knows something that Bessent does not, or Bessent is wrong that yields do not reflect underlying fundamentals. If thin liquidity pushed yields above “underlying fundamentals,” Bessent’s operations have not corrected that distortion, evident from the 30-year yield rise from 5.3% to 5.6%, despite doubling and subsequently tripling buyback sizes. Furthermore, who decides what the “underlying fundamentals” are and who gives the Treasury that authority? The market itself signals those fundamentals through prices, which also serve as a reflection of how the market expects the Fed to behave. The Fed sets short-term interest rates, which long-term rates largely follow; therefore, no operation by the Treasury can override what investors expect the Fed will do. 

Bessent’s view also underestimates the fundamentals and expectations that markets are observing. The war in Iran has sent oil prices soaring and contributed to stubborn inflation. Bond sales to finance AI data centers and other infrastructure have added to the pressure on Treasuries by drawing on similar investor funds. Additionally, interest payments on the federal debt reached $1.36 trillion in fiscal year 2026, up from $1.22 trillion a year earlier, and the national debt surpassed $40 trillion in August. The Congressional Budget Office estimates that the One Big Beautiful Bill Act alone will add $4.7 trillion to deficits through 2035. These deficit increases are choices made by the administration and Congress that grow our public debt and consequently put upward pressure on bond yields. 

The Treasury should ultimately return buybacks to small, pre-announced operations that follow a set schedule, and it should use the upcoming November 4^th refunding to set a clear plan for future buyback sizes. If the government does want to take action against higher rates, one thing that it can do is adjust the nation’s fiscal trajectory, and that task belongs to Congress, which currently spends at 23% of GDP while only collecting 17% in taxes. A difference of half a percentage point in average interest rates through 2036 can translate to trillions of additional dollars to the national debt. Therefore, Congress needs to stop passing tax cuts without offsets in spending, let expiring breaks lapse, and ultimately raise taxes enough to offset the growth of debt. Buybacks cannot meaningfully lower long-term interest rates, but a serious congressional commitment to fiscal discipline can.