Treasury to Tap Nearly $1 Trillion TGA? Bessent Highlights Sept. 9 Buyback

Original author: Li Dan

Original source: Wallstreetcn

U.S. Treasury Secretary Bessent said on Monday local time that the Treasury will conduct its next bond buyback operation on Sept. 9, and hinted that related operations will continue.

Bessent said the next bond buyback will be implemented on Sept. 9, "let's wait and see." He also said the Treasury will continue its regular Treasury auction program, "so you will hear from us again early next quarter."

Bessent's remarks come as the market is watching whether the Treasury will further expand support for the long-term Treasury market.

Earlier Monday, U.S. media, citing senior Treasury officials, reported that the Treasury is considering using nearly $1 trillion from the Treasury General Account (TGA) to fund the recently expanded bond buyback program. However, officials did not disclose how much the Treasury will ultimately use or when it will begin. Related reports show the TGA currently stands at about $950 billion.

Sept. 9 Buyback Increase Takes Effect; Bessent Says Single Operation May Exceed $4 Billion

The Sept. 9 date Bessent mentioned is not a new buyback program announced on Monday, but the effective date of the increased long-term Treasury buyback measures announced by the Treasury last Wednesday.

On Wednesday, Aug. 19, the U.S. Treasury announced that it will at least double the size of liquidity support buyback operations for 10- to 20-year and 20- to 30-year nominal Treasuries, raising the per-operation cap from $20 billion to at least $40 billion. The Treasury made clear that this adjustment takes effect on Sept. 9 and will continue until the end of the current quarterly refunding period, which is Nov. 4.

The Treasury explained at the time that the increase in buyback size is to provide more liquidity support to the long-term nominal Treasury market, as the Treasury has consistently received a large number of high-quality offers in longer-dated buyback operations, indicating strong market participation.

The day after the Treasury announced the plan, Bessent last Thursday further left room for expanding the buyback size. He said the Treasury's single long-term bond buyback operation could exceed $4 billion, and added, "This is a thinly traded market segment," and the Treasury has "ample tools" in the U.S. Treasury market.

Bessent believes the market has not fully focused on the fundamentals of the U.S. economy, and Treasury yields do not reflect fundamentals, especially the 30-year Treasury's liquidity is "particularly scarce."

As for how large the buyback size can ultimately be, Bessent said at the time it "will depend on conditions," and that "any fluctuation within 24 hours is just noise," and the Treasury is "trying to bring balance back to a weak market."

Therefore, Sept. 9 first means the previously announced buyback increase officially enters the execution phase; and Bessent's earlier statement that it "could exceed $4 billion" leaves room for the actual operation size to be higher than the previously announced minimum level.

Nearly $1 Trillion TGA May Become Buyback Funding Source; Market Reassesses "Toolbox"

A CNBC report earlier Monday said the Treasury is considering using the TGA, which is close to $950 billion, to fund the recently announced expanded bond buyback program. Two senior Treasury officials said the TGA is viewed as a potential funding source for purchasing some off-the-run Treasuries, but the specific amount and timing have not been determined.

This news is particularly noteworthy because the market's previous mainstream speculation about the funding source for the Treasury's buybacks was through issuing more short-term Treasury bills to fund the purchase of long-term Treasuries.

If the Treasury takes this approach, it would mean increasing short-term debt supply while reducing long-term bond supply, creating an effect similar to a fiscal version of "Operation Twist" on the debt maturity structure. The market has previously discussed the similarities between Treasury operations and the Federal Reserve's historical "Operation Twist."

If the Treasury directly uses TGA cash for buybacks, it means it does not have to rely entirely on new short-term Treasury issuance to raise buyback funds.

However, the TGA being close to $1 trillion does not mean the Treasury plans to spend nearly $1 trillion buying Treasuries. Current reports only show the TGA is viewed as a potential funding source, and the Treasury has not announced the actual amount to be used.

More importantly, the TGA itself is the Treasury's main operating account at the Federal Reserve, used for daily government receipts and payments. The funds the Treasury can actually use for buybacks are also constrained by government spending, debt issuance arrangements, and cash balance management targets.

Therefore, for the market, what really matters is not the absolute balance of the TGA, but whether the Treasury will use these funds, how much it will use, and at what pace it will conduct long-term Treasury buybacks.

Buyback Boost Lasts Only One Day; Long-End Yields Rise Again

The direct background of the Treasury's sudden expansion of long-term bond buybacks is that U.S. long-term Treasury yields had been persistently high.

After the announcement on Aug. 19, Treasury yields fell noticeably at one point, and the market viewed it as an important policy signal that the Treasury is trying to ease long-end financing pressure.

But this positive effect did not last long.

Last Thursday and Friday, U.S. medium- and long-term Treasury prices fell for two consecutive days, meaning the boost from the Treasury's expanded buybacks lasted only one day. The market shifted its attention back to the huge U.S. fiscal deficit, long-term debt supply, and inflationary pressures.

Last week, media noted when mentioning the decline in Treasury prices that investors believe the Treasury's new measures may only briefly curb rising borrowing costs, and market movements highlight investors' skepticism about the effectiveness of the new measures. Howard Du, a strategist at TD Securities in New York, said the market "is not fully convinced" that Bessent can truly suppress long-end yields.

This also means that after the buyback officially increases on Sept. 9, the market's focus will shift from "whether the Treasury acts" to "whether the action can truly change the supply and demand of long-term Treasuries."

From the Treasury's currently announced plan, starting Sept. 9, the per-operation cap for 10- to 20-year and 20- to 30-year Treasury buybacks will be raised to at least $40 billion. The Treasury also previously said it will provide more information on future buyback sizes at the next quarterly refunding meeting on Nov. 4.

Therefore, Sept. 9 will become an important time node for the market to test the actual effect of the Treasury's expanded buyback plan, and Monday's news about the TGA further increases the market's imagination about the Treasury's future "ammunition" scale.

But regardless of whether the buybacks are ultimately funded through TGA cash or issuance of short-term Treasury bills, this operation cannot be simply equated with Federal Reserve quantitative easing. What the Treasury can change is the debt maturity structure and demand at the margin for specific Treasuries, while the overall U.S. fiscal deficit, debt scale, and future financing needs will not disappear because of this.

For long-term Treasuries, what truly determines the yield center will still be the U.S. fiscal situation, inflation, economic growth, and investors' judgment on future Treasury supply.