Yellen's Bond Buyback Boost Lasts Just One Day! U.S. Treasury Yields Rebound Nearly Fully

U.S. Treasury yields rebounded sharply on Thursday (20th), clawing back nearly all of the previous day’s declines caused by the Treasury Department’s announcement to expand its long-dated bond buyback program. This reversal underscores how government intervention has limited success against deep-seated structural pressures in the bond market.

The yield on the 30-year Treasury, a primary target of the accelerated buybacks, rose 5.7 basis points to 5.251%. The 10-year Treasury yield, closely tied to mortgage, auto loan, and credit card rates, increased 5.1 basis points to 4.704%. The 2-year yield, more sensitive to Federal Reserve (Fed) short-term rate decisions, edged up 1.5 basis points to 4.1927%. Bond prices move inversely to yields.

On Wednesday, Treasury Secretary Janet Yellen announced plans to at least double the size of the Treasury’s buyback program, starting September 9 and running through November 4, aiming to ease selling pressure in the long-end bond market. Following the announcement, the 30-year yield briefly plunged about 10 basis points after having recently hit a near 19-year high.

However, as markets reassessed the buyback measures and long-term fixed-income challenges, the rally quickly reversed. Maia Crook, Senior Research Analyst at JPMorgan Chase, stated that the Treasury’s actions failed to address underlying structural challenges. While temporarily suppressing long-term yields, direct government intervention that deviates from a 'regular and predictable' issuance policy may actually increase the risk premium demanded by investors.

On the same day the Treasury announced the buyback plan, the total U.S. national debt officially surpassed $40 trillion. Meanwhile, corporate bond issuance driven by AI infrastructure investments has reached record levels, competing with the U.S. government for market funding and further pushing up term premiums—the additional compensation investors require for holding long-dated Treasuries.

Investors continue to digest the minutes from the Fed’s July meeting released on Wednesday. Officials indicated they might need to keep interest rates higher for longer if inflation does not make further progress. Recent data show relatively moderate monthly price increases, but inflation remains above the Fed’s 2% target. Markets will now focus on initial jobless claims and the Philadelphia Fed manufacturing survey.