The hocus-pocus show falls flat. Well, OK, then.

By Wolf Richter for WOLF STREET.

The Treasury Department announced this morning that it would buy back a “maximum par amount” (face value) of $6 billion in Treasury bonds at the buyback auction tomorrow, tripling the amount of the bond buyback auctions that Yellen had started in April 2024.

Bessent had announced on August 19 – as part of this hocus-pocus shows to push down long-term Treasury yields despite the tough issues the bond market faces – that the buybacks for 10-year notes and 20-year and 30-year bonds would be at least doubled from the $2 billion per auction that had begun under Yellen’s Treasury, to at least $4 billion. Tomorrow will be the first buyback auction under the new regime.

Treasury yields spiked initially upon the announcement, with the 30-year Treasury yield spiking by 5 basis points to 5.31% briefly (matching the prior multi-decade high) and currently trades at 5.30%. The market had hoped for some kind of big-kahuna figure, far bigger than $6 billion, and some had hoped for open-ended buybacks without set limits, etc., and so this was another disappointment for traders in a Treasury market that is troubled by the deep long-term fiscal problems of the US government.

The 10-year yield spiked to 4.85% currently, the highest since that brief period in October 2023 when it kissed the 5% mark.

This announcement came just hours before the 10-year Treasury auction today, and a day before the 30-year auction tomorrow.

The buybacks will likely occur at a substantial discount, as has been the case in the prior auctions of this type of debt, given the lower yields when those bonds were issued.

The Treasury Department has been buying back 30-year bonds that were issued in the second half of 2020 at discounts of over 50%, in effect paying less than half of the face value for those bonds. It also bought back 30-year bonds that were issued in January and February 2021 at discounts of about 47%.

During those buyback auctions, the “par value” of those bonds was $2 billion, but the actual amounts paid for those $2 billion in par value was a lot less.

Same with today’s announcement: The par value of those buybacks is capped at $6 billion at tomorrow’s auction, but the actual amounts paid will be substantially less than $6 billion.

The announcement today lists 40 bond issues, all 20-year and 30-year bonds, maturing between May 2040 and August 2046.

For example, at the top of the list is a 20-year bond, maturing in May 2040 (CUSIP 912810SR0). So this bond has about 14 more years to run and therefore trades like a 14-year bond. The government issued the bond in May 2020 with a coupon interest of 1.125%.

The yield of this bond, trading like a 14-year bond, spiked today by 5 basis points to 5.12% currently from 5.07% just before the announcement, meaning that the price fell further, and that the government might buy it back at an even bigger discount.

It already bought back $1.95 billion of par value of this same 20-year bond at the buyback auction on February 10, when yields were a lot lower than today, paying 64 cents on the dollar. So for the $1.95 billion par-value, which covered nearly all of the $2 billion buyback limit that day, it actually paid $1.248 billion.

Given the 5.12% yield now, Treasury may buy back this bond at an even bigger discount at the auction tomorrow.

In terms of the debt: Since Treasury cannot “print money,” eventually every buyback is funded by new issuance of debt. So Treasury is buying back at a massive discount some low-interest-rate debt and replaces it with smaller par amounts of debt with much higher interest rates. This lowers by a tiny bit the total debt outstanding, but the interest payments may end up being a little higher than before.

Treasury is shifting more of its debt to short-term T-bills, and T-bill interest rates, which are unstable long term – they change with the Fed’s policy rates and get high when inflation is high – will replace the fixed interest rates of this cheap long-term debt that it buys back. Just how smart that is long term, who knows. But long-term doesn’t matter at the moment. This is before the mid-terms, and that’s what matters to Bessent perhaps.

But spiking bond yields was not the goal of Bessent’s hocus-pocus show. The goal was to drive down bond yields, and to drive up bond prices. Well, OK then.

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