Bessent’s job is to sell these bonds come hell or high water, and at the lowest possible yield.

By Wolf Richter for WOLF STREET.

The US Treasury debt reached fabulous and much-anticipated $40 trillion today, after having ballooned by $1 trillion in three months, and by $3 trillion in 12 months, as tax cuts, profligate spending, the war in Iran, and the Supreme-court-triggered tariff refunds sped up the process.

These new trillions – flying by so fast that they’re hard to see – got funded, and existing debt got rolled over, at huge Treasury auctions every week, week after week, such as $742 billion in auction sales last week.

The only thing that the repeated, hackneyed debt-ceiling charades in Congress accomplished is the appearance of some flat spots in the chart, followed by spikes to make up for them.

Of that $40 trillion in Treasury securities, $32.3 trillion are “held by the public,” most of them publicly traded and held by investors, hedge funds engaged in the basis trade, banks, insurance companies, the Fed, other central banks, etc., of which $9.3 trillion are held overseas. But some of the securities are not publicly traded, such as Series I Savings Bonds (I-bonds).

The remaining $7.7 trillion of the Treasury securities are held in federal government pension funds, Social Security Trust Funds, and other “internal” government accounts. They’re owed to the beneficiaries of those accounts, they’re a true debt that is owed, but they’re not publicly traded, and are not subject to vagaries of the market with its second-to-second price changes.

Investors had to buy $1 trillion in new Treasuries over the past three months. That’s what that means when the amount “held by the public” ballooned by $1.0 trillion in three months.

That $1.0 trillion was the new supply of Treasury securities that global bond buyers had to buy in three months, in addition to refinancing all the maturing debt, and to do that, new buyers needed to be pulled off the fence and into the market.

That’s the job of yield. And yields rose during those three months until they were attractive enough, auction by auction, to entice enough investors off the fence – despite fears about inflation, reckless government spending, and even higher yields in the future – to buy $1 trillion in new Treasury securities over the past three months, in addition to refinancing the maturing debt. So yield did its job.

But that rising yield – the 30-year Treasury bond sold at auction last week at 5.22%, the highest auction yield since 2001 and then rose to 5.31% by Monday – caused Bessent to blow a fuse.

Today, the Treasury department announced that it would double the hocus-pocus Treasury buybacks that a desperate Yellen had started in April 2024 after the 10-year Treasury yield had pierced 5% briefly in October 2023.

The Treasury Department cannot create money, unlike the Fed. It has to sell new securities to buy back old securities. The buybacks are just a debt swap. And Bessent could accomplish the same thing but in much larger quantities by keeping auctions of long-term notes and bonds unchanged, and increasing the T-bill auctions, and thereby shifting issuance to T-bills, and it’s already doing that.

But Bessent wanted to soothe the bond market on the spooky day that the Treasury debt hit $40 trillion. So he came out with the hocus-pocus announcement, and long-term yields fell instantly, though the actual increase of the buybacks won’t start till September 9, and though the amounts are small compared to the $1 trillion in new debt that investors have to buy every three to five months going forward, and tiny compared to the $40 trillion in Treasury securities outstanding [my detailed analysis of Bessent’s hocus-pocus show is here].

Going forward, yields will have to be high enough to entice bond buyers off the fence and buy an additional $1 trillion of new Treasury securities every three to five months or so; yields have to be high enough to overcome their fears about inflation, government profligacy, and the new supply pushing up yields even higher.

Bessent cannot do anything about the quantity of debt coming at the market. His job is to sell these bonds, come hell or high water, and at the lowest possible yield.

Hocus-pocus debt-swaps aren’t going to do much to change those dynamics. Bessent’s last hocus-pocus announcement at the beginning of August, the big kahuna US-Japan joint intervention, pushed the 30-year yield down by 11 basis points over two days, and more intraday, from 5.28% on Friday, July 31, to 5.17% on Tuesday, August 4, 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.

Today after the announcement, the 30-year Treasury yield fell by 9 basis points, after having declined by 3 basis points the day before, to close at 5.19%. Just another squiggle in the trend:

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