Hocus pocus works with the bond market only briefly. His last hocus-pocus, the big kahuna US-Japan joint intervention, fizzled in days and bond yields marched higher.
By Wolf Richter for WOLF STREET.
The Treasury Department announced today that it would “at least double” the buyback auctions of Treasury 10-year notes, 20-year bonds, and 30-year bonds, from minuscule amounts to at least double those minuscule amounts, starting September 9 and going through November 4, at which point it will provide more info about future buybacks.
It’s not QE but a debt swap. QE involves money creation – buying notes and bonds with newly created (“printed”) money. Only the Fed can do that, and that’s what the Fed did until 2022. But the Treasury Department cannot create money. It can only get money from collecting taxes and from borrowing. Every incremental dollar it spends on anything, including buybacks, is borrowed money because 100% of the tax receipts are already spoken for.
It’s minuscule. The current maximum size of the auctions will increase from $2 billion at face value to $4 billion at face value, from minuscule to 2x minuscule.
The Treasury Department said that it would double the auction amounts in “the 10-year to 20-year sector and the 20-year to 30-year sector.”
There are 7 buyback auctions in the 10-year to 20-year sector and in the 20-year to 30-year sector scheduled during that buyback period from September 9 through November 4, that would increase from $2 billion face value each to $4 billion face value each, so that total buybacks would increase from $14 billion face value to $28 billion face value:
- Sep 10: 10-year to 20-year
- Sep 24: 20-year to 30-year
- Oct 01: 10-year to 20-year
- Oct 08: 20-year to 30-year
- Oct 15: 10-year to 20-year
- Oct 27: 20-year to 30-year
- Nov 04: 10-year to 20-year
It’s minuscule because there are $4.4 trillion of 10-year notes outstanding, and $5.5 trillion of 20-year and 30-year bonds outstanding, combined nearly $10 trillion with a T.
So the $14 billion with a B in additional buybacks in that period would amount to a little over one-thousands (0.14%) of those securities already outstanding. And that $14 billion would be obtained by increased issuance of other securities, such as T-bills, at higher interest rates.
It’s a hocus-pocus show because the Treasury cannot print money, but has to issue debt to buy back debt, and because the amounts are too small to matter. Its sole purpose is to verbally manipulate the bond market to push up bond prices and push down long-term yields, and the bond market loves to be manipulated to where prices rise because existing bondholders, especially leveraged funds, can make a lot of money, and they just need a buy signal, and Bessent just gave them another buy signal. But it only works briefly.
The last hocus-pocus show that Bessent gave was the big kahuna joint US-Japan yen intervention at the beginning of August that caused bond prices to rally and yields to drop for only a brief period, before fizzling miserably, and the 30-year yield rose to a new two-decade high, and then 30-year bonds were sold at the Treasury auction at the highest yield since 2001, which spooked Bessent.
Yellen started this hocus-pocus show in April 2024, after the 10-year Treasury yield had briefly hit 5% in October 2023, which had scared the bejesus out of her. Been there, done that, and the 30-year Treasury yield has continued to rise. Hocus pocus works with the bond market, but only briefly. Bessent is now increasing some of those auctions.
Buybacks are not new. The Treasury Department was buying back older Treasury securities in 2000 through 2002, and on a minuscule scale once or twice a year from 2014 onward, with amounts such as $25 million a year, just to keep the plumbing working.
The hocus-pocus might cause the government’s interest expense to rise. Buybacks of 30-year bonds entail huge discounts. For example, at the 20-year to 30-year buyback auction today, the Treasury bought back $175 million face value of a 30-year bond, issued in February 2021, maturing in February 2051, with a coupon interest rate of 1.875% (CUSIP 912810SU3). It paid 52.375 cents per $1 face value for it. So it bought that bond at a discount of 47.625% and paid $91.7 million for it.
But to fund this buyback, it borrowed at today’s interest rate – with T-bills, that’s close to 4.0%. So it reduced its cheap debt and increased the expensive debt. It borrowed $91.7 million of new debt at about 4% (annual interest expense of about $3.7 million) to replace $175 million face value of old debt with an interest rate of 1.875% (annual interest expense of about $3.3 million). So not much changes with that buyback, the debt comes down a little due to the discount, but the interest expense in dollar terms goes up a little, causing the deficit to increase a little.
In other words, it’s just another Bessent hocus-pocus show that changes next to nothing but is trying to manipulate the bond market. And for today, the hocus-pocus has the desired effect of bond buyers bidding up bond prices, and the 10-year Treasury yield fell by about 5 basis points, and the 30-year Treasury yield fell by about 8 basis points, and that’s what they did directly after the big kahuna US-Japan joint-intervention hocus-pocus show too, briefly.
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Was this move broadcast in advance on X?
Yields started dropping at 8:30 AM, the time of the announcement. So that was pretty clean. The announcement was made on the Treasury website for all to see. Bessent didn’t say anything on X about it.
But yields were declining a little in the two hours before and declined yesterday. So someone knew something, which is obvious because a lot of people are working on something like that. It’s not like Bessent hashes this out by himself when he sits on the john and then goes live with it.
Great article. Hilarious reply!
@WolfRichter: “It’s not like Bessent hashes this out by himself when he sits on the john and then goes live with it.”
Are you sure, Wolf? Because we all know other folks who do this all the time. ROFL.
” “at least double” the buyback auctions of Treasury ”
which mathematically describes the purpose to buy down the long term interest rate and attempt to replace the LTD which the Fed can’t control directly with short term funding at the Federal Reserve sanctified rate of interest that recently they engineered it to a negative interest rate
There are human beings alive that are paying the Bank of Italy a half of percent to guard their money for the next 50 years
Bessent reads Wolf. Bessent has epiphany. Bessent go sits on the john.
Tricks usually sit on johns ’cause it pays.
If it looks like a Chicken, walks like Chicken and tastes like Chicken then call it what it is “Quantitative Easing”. We are not in recession and we are already doing QE. I mean we are talking about inflation and now they want to add more cash in the market?
You’re polluting my site with ignorant stupid brain manure. Read the f**king article.
I understand that for you anything is QE. Next thing you tell me is that your bowel movement is stealth QE, and that this morning there was a lot of stealth QE, and then you tell me that something stinks
No matter how many times you explain it, it still doesn’t hit home.
Maybe I don’t know Fed history enough, but to me a middle ground is that it seems like the Fed is having to intervene more, do more shell game tricks & gimmicks to keep the system above water.
When they do QE, it seems to be creating all sorts of un-intended consequences. Or maybe they know what generally is going to happen & is needed, but they’re most definitely stuck between a very, very, very big rock & a very, very, very hard place.
lol, ok this actually made me laugh out loud.
I was hoping that you would point this out. CONgress needs to step up and do their damn job.
Their is a HUGE rush to real collateral (i.e. repricing of RISK). Playing paper games isn’t going to help, in fact, as you indicate, it could make things much worse.
Interesting times.
NOTE: “There”, not “Their”…
I realize the treasury market prices are up today (down in yield), but I do wonder if this failed Japan intervention and then this “buy-back” announcement today is going to start seeming like some desperation and that ends up being counter-productive because if the market starts sniffing this as desperation, it could respond accordingly.
If investors start losing faith in Fed credibility and Treasury credibility, probably not a good thing in the longer term.
I’m only a small investor, but I’ve lost faith in Fed and Treasury credibility. I was always a conservative investor and lost out on some big gains in the past, but have done alright. My big thing is that I can usually sleep at night. Not sure where to be in the coming AI bubble burst.
I’m the same way.
As for the AI bubble bursting, I’m less concerned about the bubble bursting than I am with something pretty bad happening sooner rather than later.
I think a reasonably successful cyber attack on JPM Chase that causes them to be in a middle of a “where’s the missing money?” quagmire would do the trick.
It is desperation.
He did have to close his attempt at his own hedge fund.
Now running the US Treasury as a reward for incompetence.
Is this a great country or what?
Desperation abounds…
Fine.
But it took 55-75 years of grotesque DC/institutional irresponsibility to get to this ugly, ugly place.
I have no love for Trump or his dingbat minions.
But generation upon generation of both parties’ self-dealing and relentless irresponsibility is what sealed the fate of this nation’s economy.
Not the last 5 minutes, or 5 months.
Our Fearless Leader knows less about how capital markets work and thinks he knows how to WORK the capital markets. So he sends his minions out to juice the system but they’re dealing with the most efficient markets in the world. An administration can lie, but eventually the market eats lies and reaches the right equilibrium. The minions get points for trying. You can only cry WOLF! so many times and the affect eventually diminishes.( No pun intended Mr. Wolf). These end up being minor hiccups along the way in an economy that is booming with the usual leverage building to create a long term supply of something in a short term period that can’t be utilized for years. Prepare for the supply choke with inflation then a lack of demand that slows the boat on its way into a safe harbor. Boom bust, boom bust and so it goes. Ride the wave all the way in.
LOL! Show me just one post-2009 chart that demonstrates the eCONomy is busting.
The bad DEBT created in the lead up to the 2008/2009 FRAUD (call it what it really was) and more created since, NONE of it has cleared.
“Busts” and deflation (especially in paper assets) have been banned!
Interesting times.
Pragmatism. Our “bond trader in chief” (with a little help from the Fed) is doing a solid job preventing bonds crashing (yields skyrocketing). Bessent learned from one of best (Soros, who took down the Bank of England).
Bond bears had better be careful. I’d think twice before taking the other side of any trade with Bessent.
Yes, good short-term trade. The last hocus-pocus trade in early August — the big kahuna US-Japan intervention — pushed the 30-year yield down by 11 basis points over two days, from 5.28% on Friday Jul 31 to 5.17% in Tuesday, and more intraday, most of it right after the announcement. And that was it, and the yield began to zigzag higher and hit 5.31% on Monday this week.
Fact is, yields have to be high enough for bond buyers to come off the fence and buy an additional $1 trillion in Treasury securities every 5 months or so on average, despite their fears about inflation, government profligacy, and the new supply pushing up yields even higher in the future.
MW: Fed minutes reveal growing support for rate hikes at July meeting
To WB…. look at the GDP chart for 2019 to 2021. Huge bust, followed by massive fiscal and monetary intervention and high inflation. Current boom cycle is just getting underway. Maybe another 2 to 3 years. Ride the wave then sit on the beach.
LOL! GDP is a joke.
Show me the 30-50% losses, because only then does the “market” even begin to reflect reality from the standpoint of true price discovery.
Just tell us what financial firm you work for already.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Written by the Austrian economist, political philosopher, and Nobel laureate Friedrich A. Hayek. It appears on page 76 of his 1988 book, The Fatal Conceit: The Errors of Socialism.
I always like Galbraith’s comment, too: ” the only function of economic forecasting is to make astrology look respectable. “
Yep. The Epstein class has been playing paper games and buying CONgress to keep it going. Meanwhile, the laws of Nature (physics, thermodynamics, etc.) chug along keeping the true balance sheet as it were. Eventually, you have to pay the piper. I am just happy that my father didn’t live to see 2007/2008 and the government’s response (or lack of accountability). He was former military that later became a real estate attorney and a witness for the state during the S&L fraud of the 80’s. He was receiving death threats from wall street bankers who went to prison. What happen to all the men of integrity? We are fast arriving at the same place the former soviet union found itself in before it collapsed, just coming at it from another direction.
Interesting times.
great job Bessent! We should not be surprised though under this guy’s management AUM Key Square Capital Management tanked over 95%…
his last hocus-pocus show — the big kahuna joint US-Japan intervention — fizzled in two days.
What a clown show.
“So not much changes with that buyback, the debt comes down a little due to the discount, but the interest expense in dollar terms goes up a little.”
Would this cause the deficit to decline by the gain on repurchase of Treasury bonds at a discount or would the national debt just decline? Would interest expense increase by a smaller amount than the gain on the repurchase because T-bills are cheaper than the yield to maturity of the longer term retired Treasury bonds?
I understand these are very minor changes but I am trying to wrap my head around the government accounting for this.
The discount of the buybacks would cause the national debt to decline a little. But the higher rates of the new debt that has to be issued to buy back the old low-rate debt will cause the interest expense to actually rise, as I pointed out.
That increase in interest expense, though small, would increase the deficit by a little.
None of the amounts are big enough to matter. It’s all just hocus pocus.
You can see it’s hocus pocus because bond yields fell today, and those additional buybacks won’t even start for another two weeks.
Think you might get a kick out of this. It was on my Google finance page:
“ US market summary
Treasury debt buyback expansion snaps Wall Street losing streak
Major U.S. stock indexes closed higher on Wednesday, breaking a three-day downslide after the Treasury Department intervened to support bond liquidity. The government announced it would double its weekly repurchases of longer-dated nominal coupon securities to at least $4 billion, helping to ease the upward pressure on multi-decade high yields.”
It’s worthwhile to Keep an eye on the subscription rate for investors to sell the treasury bonds during buyback vs the subscription rate for investors to buy bonds for at the run auctions
Wolf R: “Keep calm children! The value of your dollar is getting trampled/demolished, but I assure you, you all have nothing to worry about.
I mean why would countries be dumping U.S. debt – they just don’t seem to understand.”
Fair point to not call it QE but people see this as the Plunge Protection Team being activated regardless of what we call it.
Looking forward to see if the hocus pocus fails.
From my understanding, Bessent has been perceived as on of the “adults in the room.” Surely he’s aware of the hocus-pocus nature of this sort of thing.
So it seems like either 1) he sees something around the corner that the rest of the world doesn’t have access to yet; or 2) he’s trying to placate his boss, who wants interest rates back at zero today, where they should remain always and forever.
This is the same guy who stated last week that starting this (Monday), Iran will face economic attacks and hardships “the like the World has never seen before”. Today is already Wednesday. Crickets. No changes yet. He does and says what his boss demands, imho. I don’t think he sees around any corners. Lots of talk this morning on the 40 trillion debt, though.
If he hadn’t intervened then the 20 year auction today would have been the highest on record. So it went off as the 2nd highest on record.
The Yentervention effect faded in the US Bond market after just 2 weeks.
I’m told that Bessent is keeping a diary and plans to release an autobiographical work tentatively called “The Echoes of Yellen” which will be patterned off “The Basketball Diaries” with similar themes of addiction and failure.
Very clear explanation, I am learning from your posts!
Thanks for the honest analysis. The MSM is definitely not covering all the facts. Just more market manipulation!
Well wait a second. If the Treasury can buy back the 1.8% bonds from 2021 for 46 cents on the dollar, then haven’t they effectively reduced the outstanding debt by a substantial amount? Yes they need to finance that payoff at today’s rates but the principal has been reduced.
If someone with a 3% mortgage from 2022 got a letter from the bank saying “you either owe us $500k paid over the next 26 years or $300k paid today” I think most mortgage payers would jump at the chance and borrow the $300k at 7% – because maybe they’d be able to refi that much smaller principal back to 3% someday.
Well wait a second. Conceptual error. You cannot compare Treasuries to a mortgage.
A mortgage is secured by an asset (the house), and you can sell the house and pay off the mortgage with the sales proceeds, and if the principal owed is lower, you walk away with more cash.
Treasuries are not secured by an asset. The government cannot sell an underlying asset to pay off the Treasuries. It has to borrow new money to pay off old Treasuries. And that replacement of debt takes place at unfavorable rates.
Treasuries are indeed secured — by the future tax revenues of the US government.
No, not secured. You as bondholder have no lien on the tax revenues. Treasuries are only guaranteed by the full “faith and credit” of the government, whatever that’s worth, and that’s it.
But the lender has a lien on your house and can take your house if you don’t pay the debt.
the us government can surely sell off land and buildings……it owns. they’ve done it over the past 250 years in fact.
That isn’t how it works.
This is like someone having $2000 in his checking account taking it out and making an extra payment on his low interest mortgage (and thus feel good about himself for helping pay off his mortgage early). But then next week when the taxes and electricity bills are due he takes out $2000 on his revolving HELOC (at a higher interest rate than his mortgage) to pay those bills.
It is a stupid short term shot of dopamine that costs more money in the long run.
Great article.
With the current government’s plan to increase borrowing, while simultaneously discouraging monetary restriction, I imagine that “hocus pocus” is the only tactic really available to the Treasury as it attempts to reduce borrowing costs.
But I was assured this grifter was different!
The party, rather the scheme, is coming to an abrupt end. End in sight? Watch out pensions! Watch out IRAs and 401-Ks. What looked like a person needing a little assistance in the deep end will end up as a DOA at the emergency room! Next stop – graveyard. 50% interest isn’t sufficient.
This is one of those hocus pocus tricks that you can get away with tricking smart people once. After that they learn and it doesn’t work again.
Doing this now just reeks of desperation and not only is it going to cost more money in the long run, there is a decent chance it backfires in the long run as the bond market sees just how desperate this administration is. Long term rates might end up higher than they otherwise would have because everyone sees that the administration would rather try stupid tricks rather than address the underlying long term problem.
Dare I say that addressing the long term problem may require much higher tax revenues? DOGE already skinned spending to the bone as it is.
Also…
I don’t have the exact numbers handy, but I believe today’s 5+% rates with 130% debt to GDP are just as serious of concern as the 20% rates from 1981 with debt only being 30% of GDP back then?
I only say this because I grew tired of those claiming, “Why so worried about interest rates today? Heck, back in my time we went uphill both ways with 20% rates.”
What’s needed is needed to start is to eliminate a much waste & fraud as we possibly can. People can more readily accept tipping the economy into a recession for this reason versus rolling back the Trump tax cuts & then making everyone pay an extra 10%.
Start with the Pentagon which has now failed 8 audits in a row! It’s also where a big chunk of our spending goes and likely we would find the most fraud and abuse.
“Eliminate fraud and abuse” is just the anti-tax conservative get out of jail free card that, on the left, is rephrased as “tax the billionaires.”
The USA is a country of people who don’t want to pay for anything, so is it a surprise that the government has taken on that stance with debt?
And if you’re going to raise taxes, doing so on corporations is probably the place to start.
8.7% of revenue as of 2022.
Taxing corporations will only make them pass on the tax increases directly to the consumer, which is much more regressive than taxing individual billionaires, centi-millionaires, and deci-millionaires more than their secretaries (paraphrasing Warren Buffett).
Zero, if your logic is sound, please explain why corporations are always lobbying for tax decreases. If they just pass it on, they shouldn’t care about taxes.
Bobber,
Corps fighting for lower corporate tax are only driven by their own profit motive. Just because a corporate tax is more regressive than individual tax doesn’t mean corporations won’t fight it for the sake of their own self-interest. The regressiveness of a tax and corporations fighting the tax for better profit are independent factors.
Generally the corps want the lower corp tax AND keep the highest individual shareholder/owner tax bracket low. That candle won’t and can’t be burnt at both ends forever.
Zero Sum Game, the argument that “corporations will always pass the costs on to consumers” was BS when it was used as an argument against tariffs, and it’s BS now.
Let’s take a company that sells a widget for $100. If the company has imposed on it $20 worth of taxes or tariffs, your argument is that they’ll raise their price per widget to $120, and the consumers will have no choice but to pay.
But if that was the case, why wouldn’t they raise prices to $120 even without the tariff of tax? The fact is, they are going to charge as much as they can get away with charging. Their costs are simply not a factor.
DOGE didn’t even save that much money (if any, considering the costs of its own waste, fraud and abuse, much of which ended up in court). The GAO just released a report on how much of a mess their accounting was: GAO-26-108615
“the bond market loves to be manipulated to where prices rise”
Just making it more attractive for Japan to sell, if they weren’t so worried about upsetting the United States.
$2B / $40.047B = 0.0000499
Yeah, that’s pretty miniscule.
We’ve made it to the next $10B which only took about 5 years.
It sure seems like fall 2007 all over again, at least in terms of the national fiscal situation.
Is this not a jawbone form of yield curve control?
It’s jawboning. Good for a day or two. But it doesn’t “control” anything. The bond market is free to do whatever it wants, unlike YCC when the central bank buys unlimited amounts of bonds with newly created money as soon as yields go over the limit. YCC is an actual “control” of the bond market, but it blows up the currency, see Japan. Even Japan had to abandon YCC and QE and switch to a fairly aggressive QT because YCC was destroying the yen, and once that starts, it’s hard to stop.
I like the jawboning and desperation comments. First with the Yen and now this with long-term yields. Both amounts of buying were miniscule compared to the total market. This will end badly imo.
RELAX:
Like Mr. Wolf says this $2 billion to $4 billion is minuscule. AI says this helps liquidity for financial institutions. Check it out, when you go to a bank to roll over a CD there are only a couple terms that pay some interest, the rest are absolute dogs even just +/- one month, yet the paper is like legal size. All the banks like Silicon got bailed out of large percentage holdings of ZIRP securities. This $2 to $4 billion is probably just the junk of rounding errors or fell through the cracks, like in the bottom of some fat oligarch bankers drawer buried under some lunch condiments (packages of ketchup, chop sticks, napkins, etc.) found only when he retires by the cleaning crew.
Whining: We all know that bankers whine, especially when you are used to a private club free lunch & dinner everyday like that at the end of the “Margin Call” movie. These bankers have been Whining since their nanny stopped tying their shoelaces for them. “Much ado about nothing;” no wonder they can’t get a real girlfriend for themselves, but that’s a non-financial story.
AI slop that you don’t know what to do with and therefore twist into absurdity that I have to waste my time on. If you ask AI, stew in the results by yourself.
This “liquidity” has nothing to do with banks. It’s “liquidity” in the bond market. Bond markets are illiquid by nature, because every bond is different. There is only one kind of Nvidia share, and all shares of Nvidia are the same, and there is one price for all. But there are a gazillion of different bonds, with different coupon interest rates, different maturity dates, different issue dates, etc. And each of these bonds has a different price. And some of these bonds might not trade for months or years. Better “liquidity” in the bond market means that the bid-ask spread gets narrower, that deals happen more easily, and that you can sell a $2 billion position without tanking the market. The Treasury market is the most liquid bond market in the world, but it’s still not very liquid for older bonds.
Great article here- thanks Wolf. I’m still amazed how much of the job of someone like Bessent and Yellen is sweet-talking the market and giving it a bit of something it wants for small movements like a snake charmer. Incredible.
The market gave people an opportunity to sell assets at higher prices and it sure helped the gold and silver investors…
How frustrated must Warsh be that Bessent is undermining his efforts to center market forces rather than government guidance?
We swapped the dot plot for Bessent’s notepad.
Actually I think Treasury is buying the Warsh Fed a little breathing room.
And sparing Congress from embarrassment during the summer “recess”.
And also holding things together just long enough to push the next crisis past the November midterm elections.
Inflation and fiscal solvency and other financial crises are best confronted with a lame-duck Congress and lame-duck President. As in November-December 2008.
Is this a bailout of people who bought bonds during the pandemic? Bessent pays these bondholders face value and lets them off the hook, and they agree to show up at bond auctions? If that is the case, the buybacks don’t need to be big. They only need to clean up the two years with the low yields.
Read the part in the article about today’s buyback at a discount. Today, they bought back a 30-year bond issued in February 2021 at a 46% discount. That’s not a bailout, that’s a decapitation 🤣
I wasn’t being smug, I just don’t know how this works. I assumed that if a bond is redeemed, you get face value for it. If I buy a CD, my money is always guaranteed by the bank even if I cannot re-sell it on the open market. If they redeem it early, you get all your money back and can go buy at today’s rates.
If that’s not the case, why sell it back? You are selling at the worst time. It is likely rates come down and you recover some value, right? You clear it off your books and can chase profits somewhere else, but it seems like a bad deal.
These are buyback auctions at which bondholders offer to sell their bonds long before they mature, and are willing to get a big haircut in return (46% today on that one issue). They could also sell those bonds in the bond market (such as through their broker) and get a similar haircut.
When investors hold bonds to maturity, then they get face value. Till maturity for those 30-year bonds that got bought back today means holding them till February 2051. And many bondholders will do that, and they’ll get face value, but they earn only 1.875% per year in interest along the way for another 25 years, which is a shitty deal, because they could earn 5.2% with new bonds.
So that’s the choice: Sell at a huge discount and buy new bonds with a 5.2% yield; or keep the bonds and earn a shitty 1.875% in interest for 25 years. The result is the same. It’s bond math. Just depends what kind of beating you prefer.
Wolf, with the scenario of selling a 30 yr bond at a discount of 46%, with my limited understanding of exactly how this would play out… I did a quick down and dirty calculation.
A $1,000,000 bond bout in Feb ’21 can be sold for $460,000 (or would that be a $540,000 redemption?). I’m assuming for this example it would be $460,000. Buying a 30 year with that 460,000 @ 5.2% would pay out $23,920/yr. Multiplied by the 25 remaining years, interest would total $598,000. That interest added back to the bond principle of $460,000 would have a total redemption value of 1,058,000 or more than if the original bond was held to maturity.
I’m probably missing something in how this all works, but if this were the case, why wouldn’t all bondholders of that auction try to sell and buy back… Also, a loss on the sale might have some tax benefits?
Wolf, your understanding of how this scenario works would be very much appreciated, especially to point out what I calculated wrongly. Thank in advance.
There is a section at the bottom of the article where I run through the numbers in dollar terms, of an actual buyback of a 30-year bond that they did today.
Thank you, Wolf!
This makes sense to sell in some cases with a 46% loss.
Rosarito Dave gave a good example of bond math but maybe missed 6 months of interest and a few basis points difference in current rates which could cause a slight profit or loss over the next 24.5 years.
If I thought rates would go higher, then selling the old bonds and then rebuying next week at more than 5.2% would make sense.
Wolf, thank you for all that you do!!
I’m a little confused. Is Bessent calling these bonds forcing holders into a 46% decapitation?
Or are people lining up to be decapitated? Why? Unless these holders believe rates will go much higher and want to avoid the classic “I’m not dead yet” decapitation and multiple amputation scene?
Not the same but if someone offered me 46% off my house list price, I’d have to be pretty desperate to take it.
Thank you again!
BobE –
Treasuries are not callable. The trades are made by voluntary selling. There are plenty of reasons why someone might need to sell. Including realizing that things might get quite a bit worse before they get better.
“It’s a hocus-pocus show because the Treasury cannot print money, but has to issue debt to buy back debt.”
It would also be a hocus-pocus show if the Treasury could print money to buy back debt. It could be argued that today’s announcement actually demonstrates a real-world constraint of sell-to-buy.
Bessent is hiding behind smoke and mirrors because no one in the government wants to increase taxes and reduce spending. I’m waiting to see how far rates have to increase for our politicians to address our debt binge. And, it’s not like this problem isn’t a global one.
47.625 % discount- someone took a huge loss-maybe they think rates are going higher and their loss could be even greater. They may also be a major buyer in the future.
It could be something as boring as accounting treatment. Maybe for whatever reason, such an owner of long-term treasury bonds wants to realize the loss, and take a charge-off on their income statement today, rather than have an impaired asset sitting on their balance sheet for the next 25 years.
My takeaway is that the Fed is not raising rates until the midterms. Not with this administration.
Trump would probably lose his mind if they raised after this stunt.
I guess this is a blame dodge by Bessent. Not my fault for why Trump’s buddies are hollering at him about the 10-year / mortgage rates.
Yellen in 2024?
Yellen, Janet Yellen, 006, stirred not shaken.
This is one of those rare instances where I will take some exception to your articulation Wolf.
This is Hocus-Pocus.
But…
“And that $14 billion would be obtained by increased issuance of other securities, such as T-bills, at higher interest rates.”
While you allude to the discount of the purchased bonds I think your discussion misses the point. What Bessent is in actuality doing is purchasing high cost long term debt and replacing it with slightly less expensive (currently) short term debt. Focusing on the coupon of the long term debt is not the ideal way to assess the economics. Based on the price Treasury will purchase this debt, if it has a current YTM of 5.2% (and Treasury purchases at that yield) that is the cost that should be used and compared to the financing cost; bills are currently in the 3.7% range, low 4’s for notes etc. He is effectively betting that he will be able to roll over those short term financings at rates consistently lower than the buyback YTM over the entire time period. Obviously thats a huge risk and it could easily backfire, but on a current basis he is helping the fiscal situation of the government. Focusing purely on the cash cost of immediate coupon/bill interest payments does not represent the true cost of financing. Using your method he could issue zero coupon bonds (say at 5.4%) to retire these currently existing cash interest bonds and save money due to the lack of cash interest payments. Obviously that is not true.
You need to read the whole section where I break it down into dollars, this section here towards the bottom of the article:
For example, at the 20-year to 30-year buyback auction today, the Treasury bought back $175 million face value of a 30-year bond, issued in February 2021, maturing in February 2051, with a coupon interest rate of 1.875% (CUSIP 912810SU3). It paid 52.375 cents per $1 face value for it. So it bought that bond at a discount of 47.625% and paid $91.7 million for it.
But to fund this buyback, it borrowed at today’s interest rate – with T-bills, that’s close to 4.0%. So it reduced its cheap debt and increased the expensive debt. It borrowed $91.7 million of new debt at about 4% (annual interest expense of about $3.7 million) to replace $175 million face value of old debt with an interest rate of 1.875% (annual interest expense of about $3.3 million). So not much changes with that buyback, the debt comes down a little due to the discount, but the interest expense in dollar terms goes up a little, causing the deficit to increase a little.
In other words, it’s just another Bessent hocus-pocus show that changes next to nothing but is trying to manipulate the bond market.
I read that. But what you are ignoring is the $83.3 million of avoided cash outflow on the debt that was purchased. This is $175,000,000 (would’ve been due at maturity) – $91,656,250 (Amt paid today $175mil * .52375) = $83+ million. This $83 million would be properly accounted for as additional accretion of interest expense to the government over the period thru February 2051.
If I were the buyer of the debt as the government was, I would receive my 1.875% each year in cash. Plus I would have an additional interest income of $476+ per $1000 which I would receive in the form of a lump sum at maturity (and be taxed accordingly or I could choose to accrete annually).
Similar to TIPS, the governments interest expense is not just the cash coupon payment. It also included the accretion in value that happens each year due to CPI increases. Although in the TIPS case that portion is not predictable in advance.
And using my contra example, if Treasury had purchased the $175 million of 1.875% debt @ .52375 but instead of issuing bills/notes they issued a zero coupon bond today with an issuance discount value of $91.7 million but issued at a YTM of 5.4% with a final maturity of Feb 2051 that would result in a maturity amount due well in excess of $175 million (due to the higher YTM vs the purchased bonds). Are you going to say Bessent is saving taxpayers $175,000,000 * 1.875% per year??? He saved the cash interest layout each year, yes, but he actually cost them money.
You still didn’t read it 🤣
“But the Treasury Department cannot create money. It can only get money from collecting taxes and from borrowing. Every incremental dollar it spends on anything, including buybacks, is borrowed money”
I haven’t read all the comments so I don’t know if this has come up from the discussion so far, BUT, what about the United States Notes that were issued by the Treasury for over a hundred years up until 1971. Has there been legislation that prevents that form of currency being issued in the future?
The Fed issues currency “Federal Reserve Notes” that are in your pocket. The United States Notes are history. Like a lot of old paper money, if you have one hidden somewhere, you can still redeem it. But Treasury destroyed the last it had and they’re not circulating anymore. But in the future, pigs might fly.
The US dollar fell almost 1% against the Euro over Bessent’s $14 billion dollar “adjustment”. Glad we have the best and the brightest running the Treasury department.
To what degree do increasing rates on foreign debt from other major sellers influence US rates? I know that in recent years most major sellers (UK, FR, DE, JN) have all had to raise rates as well but don’t have a strong thesis on how much the US is a leader vs follower.
It’s almost as if Bessent, Warsh and the JCB crew are finally facing the invisible hand of the long-lost Bond Vigilantes…
The only thing I would say is that the announcement says “at least” double. They could buy $50 billion per event, so $350 billion during the period and be right within the announcement. That would have an impact, I think.
The other thing to note is that Bessent was dealt a bad hand. He complained about Yellen not taking advantage of the 2% yields to expand back end issuance. but consider this, what is different about Bessent swapping a fixed rate mortgage for a variable rate one since rates are lower? people do that all the time
“They could buy $50 billion per event, so $350 billion during the period”
They can sure try that. But it might have the impact of blowing up the bond market by destroying confidence in the Treasury’s management of the debt and have the opposite of the desired effect.
If they go to $50 billion in buybacks per buyback auction, or $350 billion spread over the two-month period, they will have to add $350 billion to their stock of T-bills over those two months, each T-bill auction will swell from $100 billion now to $200 billion or more two months from now, and they constantly mature (1 month to 12 months) and have to be constantly refinanced in ever bigger auctions, and you’ll get $300 billion per T-bill auction by early next year, and it’s going to mess up the market, and long-term yields would spike because the market would lose confidence in the Treasury Department’s management of the debt. Treasury cannot fuck with the bond market like that.
They can increase the T-bill issuance, but only slowly and carefully, and they have to give long enough a warning.
Also the debt is growing by $2.2 trillion a year, meaning that the maturing portion of $40 trillion, including all $7 trillion of T-bills, will have to get refinanced as they mature, plus they have to sell $2.2 trillion a year in NEW securities that they need to find buyers for. And they need to spread this $2.2 trillion across the full range of securities to spread the burden for investors. And if they spook investors, they’re going to stay away, and yields will spike.
What they can do is announce at the next quarterly refunding statement that they will issue the same amount or even slightly less of long-term bonds and add even more T-bills, and they’ve already doing that, and they can do more of that, but slowly. And that’s not without risk either.
There is no easy way to fix the debt. If Bessent spooks the bond market, the vigilantes will rise from their graves, and then yields will spike and stay high for a long time, long after Bessent is gone. He needs to be VERY careful.
Bond market volatility returned in force on Thursday, with a jump in U.S. government yields erasing nearly all of the decline the previous day, when the Treasury Department announced an effort to rein in rising borrowing costs. Anxiety about the war in Iran, the state of the economy and government finances fueled the sell-off.
WOLFSTRADAMUS STRIKES AGAIN!
Wolf, care to comment on this tweet?
Lukas Ekwueme
@ekwufinance
“Here is how Bessent’s Treasury QE works:
– Step 1: Bessent issues UST bills.
– Step 2: The Fed prints money to buy them.
– Step 3: Bessent uses the proceeds to buy long-term USTs.
They don’t call it QE because the Fed doesn’t intervene directly in the long end…
Meanwhile the Fed is buying UST bills at a faster pace than during Covid.
I’m pretty sure we will effectively get YCC… just with a different name tag.”
What is your take on this? Nonsense?
Also, according to MMT monetary operation description, the governments spends money into existence, there is no borrowing and taxes comes after spending. The Fed, in coordination with the Treasury, (the MMT framework sees the Fed simply as a government agency) always make sure there are enough reserves to buy any new bond issue and in doing so keeping the illusion of borrowing before spending (technically the Treasury cannot run an overnight overdraft at the Fed).
Warren Mosler once said that there is an operational setup in place (Fed and Primary Dealers) for the government to run, in theory, unlimited deficits. The only real limit is obviously inflation and real resource availability.
I would love to hear your words about this.
The X post is an ignorant stupid-ass lie, concocted by a moron, to be clicked on by morons, garbage BS that pollutes the internet, but get clicks. It gets clicks because the bigger the bullshit, the more the clicks, which is why you dragged it into here, which is why the internet is such a toxic place. Numerous studies have shown that even moderate exposure to these toxins gives people dementia and brain cancer.
I’m shocked and appalled that you polluted this site by dragging this stupid-ass toxic shit into here. Now I gotta go and mop the floor behind you with ammonia. And then I gotta file an incident report with the EPA.
And stick your braindead MMT garbage somewhere else.
Those bond holders are getting screwed… I’m not a holder, now I’ll be never be a holder.
Lacy Hunt commented last night on a ZH debate/discussion with Brent Johnson that the Federal Reserve balance sheet has expanded by $200B since December 2025 – I just checked the FED chart and it’s correct. 6.55K to now 6.75K. So the FED balance sheet has been expanding. What have they been buying? Buying more than they are selling.
Read the effing article:, and I mean READ IT:
https://wolfstreet.com/2026/08/13/fed-cuts-reserve-management-purchases-rmps-to-zero-starting-august-14/
I’ve only been talking about it for 9 months!!! Did Hunt just wake up? But it was tapered after April 15 and stopped as of Aug 14.