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 to $4 billion, 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 each to $4 billion each, so that total buybacks would increase from $14 billion to $28 billion:
- 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 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 back about $334 million face value of that bond at a discount of 47.625%.
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 $175 million of new debt at about 4% (annual interest expense of about $7 million) to replace $334 million face value of old debt with an interest rate of 1.875% (annual interest expense of about $6.3 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.
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.
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-ass brain manure. Read the f**king article.
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.
It is desperation.
MW: Fed minutes reveal growing support for rate hikes at July meeting
“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.
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.
“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.
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