Treasury Buybacks Fail to Cap Long-Term Yields as Spending Surges

The buyback that barely registered

In late summer, the U.S. Treasury began buying back more of its own long-dated debt. The aim was to steady a selloff in the long end of the bond market. Six weeks later, the evidence shows how little a debt manager can do when the economy and the deficit both push the other way.

On September 9, Treasury Secretary Scott Bessent said the department would repurchase up to $6 billion of securities maturing in 10 to 20 years. That was three times the earlier $2 billion ceiling for similar long-dated operations.16 It followed an August 19 pledge to at least double long-end buybacks through November 4. That August announcement surprised investors because it came outside Treasury's normal quarterly refunding schedule.18

The market's reaction was not what officials wanted. The 10-year yield rose to 4.85% the day of the announcement, its highest since October 2023.3 The next day, Treasury bought only $5.19 billion of the $6 billion maximum, even though it received $10.5 billion in offers. The 10-year then climbed 11 basis points to 4.95%.8 By September 15 it had reached 5.00%, and the 20-year peaked near 5.40%.1 Part of the problem was expectations: some traders had been looking for an operation as large as $10 billion.6

The selloff continued from there. The 10-year hit 5.35% on October 7, and the 30-year neared 5.7%. Both were above where they stood before the August expansion.24 Reports differ on how far back the comparison goes. Some describe the 10-year as at its highest since mid-2007, while others put the move at a two-decade-plus high. Either way, borrowing costs are at levels last seen before the financial crisis.12152

Consumer spending supplied the next push

If the buybacks failed to calm the market, the September 30 data release made things worse. The Bureau of Economic Analysis reported that inflation-adjusted personal spending rose 0.6% in August, the biggest monthly gain since March of last year.20 Before adjusting for inflation, spending grew about 0.86% from July and 6.1% from a year earlier, to an annual rate of $22.3 trillion.16 Spending on cars, recreational goods and clothing grew particularly fast.16

That day, the 30-year yield rose as much as 6 basis points to 5.63%, its highest since 2002. Treasury announced another buyback of up to $6 billion of longer-dated bonds at about the same time.1213 The buyback news did little to ease the selling.12 Natixis rates strategist John Briggs called the trading poor and compared it to a buyers' strike, with too few bids to absorb the steady flow of long-dated supply.12 The 10-year closed the session around 5.29% to 5.30%.2016

The short end moved the other way, and that is the most useful clue to what is going on. The 2-year yield, which tracks expectations for Fed policy most closely, fell as much as 5 basis points to 4.82%. The Fed's preferred inflation gauge had come in cooler than forecast.1213 Core PCE rose 3% from a year earlier, below the 3.3% economists expected.20 Traders lowered the odds of an October rate hike from roughly even to around 36%. Some live market coverage put the figure nearer 40%.1220

Put simply, the inflation data reduced near-term rate expectations, but long-term yields still rose. That points to forces beyond the next Fed meeting. The curve between the 2-year and 10-year steepened even though that inflation report would normally have lifted bonds.14

Why the spending picture is less reassuring than it looks

The August spending number looks strong at first glance, but the details are weaker. Personal income rose only 0.2% in August. After-inflation disposable income did not grow at all. Households covered the gap by saving less: the savings rate fell to 4.1% from 4.6% in July.14 Deloitte has noted that spending has grown faster than after-tax income since mid-2024, and that the gap widened this year. The firm expects consumers to pull back soon and forecasts real spending growth slowing to 1.4% next year.17

This is the main tension for the bond market. Federal Reserve Chairman Kevin Warsh and regional presidents Beth Hammack and Anna Paulson have mostly attributed higher yields to economic strength. They point to resilient consumers, steady employment and the AI investment cycle.15 Ed Yardeni put it more simply, saying yields jumped because the economy is booming.15 Real household consumption grew at a 3.4% annualized pace in the second quarter. The Atlanta Fed's GDPNow model suggested third-quarter spending growth could approach 4%.1519

Other analysts put more weight on fiscal problems. Wil Stith of Wilmington Trust said growth has contributed, but he blamed most of the move on government spending and a widening deficit.15 Barclays rates strategist Anshul Pradhan argued the 30-year's fair value could reach 6%. His case rests on productivity gains from heavy tech-sector capital spending, which would keep the Fed from cutting as far as futures markets expect.12

Where the analysts agree

Analysts disagree about why yields are rising. They largely agree that buybacks will not stop it. Mike O'Rourke of JonesTrading said rising federal debt, which passed $40 trillion in August, is the main cause. He called the buyback effort tinkering at the edges of the market.3 Columbia's Brett House said repurchases do nothing about a deficit that still needs financing.3 Janney Montgomery's Guy LeBas noted that market interventions have a poor track record.3 Ed Yardeni called the $6 billion a rounding error in a Treasury market of about $32 trillion.10 Goldman Sachs analysts said changing the mix of debt Treasury issues does not change how much the government has to borrow.2

Schwab's analysis made a similar point. It found that buybacks might put a soft ceiling on long-term yields at most. It also warned that a much more aggressive intervention could backfire by weakening confidence in the Treasury market.7 Bryn Mawr Trust's Jim Barnes went further. He argued that the signal mattered more than the size: by visibly stepping in, Treasury may have suggested that its debt problems are worse than investors thought.6

Not all of the criticism holds up. Treasury describes the program as a liquidity tool, not a yield target. Its stated purpose is to give holders a regular chance to sell older off-the-run bonds, many of them low-coupon pandemic-era issues now trading well below par.15 ING's Padhraic Garvey said Treasury is within its rights to turn down offers priced too high, and that doing so does not mean the program has failed.5 Some market participants read the lower acceptance rates as a sign the program is working, because fewer illiquid bonds are left to sell.5

On its own terms, that defense is reasonable. But it does not match how the program was presented. The August announcement came off-cycle, and the political framing was about easing borrowing costs. That led markets to read the buybacks as a yield policy.583 Bessent's later comment that he cannot set the equilibrium price looks like an admission that the program was oversold.10

What it means for borrowers

The effects on households are already visible. Freddie Mac's average 30-year fixed mortgage rate has risen to 7.03%, up from 6.30% a year earlier.12 Freddie Mac research finds that movements in the 10-year yield explain almost all of the weekly changes in mortgage rates.10 Rising long-term rates are also lifting corporate borrowing costs. In the week through October 2, Treasuries maturing in 20 years or more lost 1.8%, while shorter maturities gained.14

Our read

The evidence points to a single conclusion: the long end of the Treasury market is being priced on growth, inflation risk and deficit risk, and $6 billion operations are too small to change any of them. August's spending data mattered because it strengthened the case that the economy can absorb higher rates. The cooler inflation reading did not offset it.1312

The spending strength rests partly on lower savings, so it may not last. If consumers slow down as Deloitte expects, long bonds could recover, and Barclays' alternative scenario has intermediate maturities gaining the most.1712 There were signs of buyers returning: the 10-year was around 5.23% to 5.24% by October 8.18 Until growth actually slows, investors should treat buybacks as a tool for keeping the market working smoothly, not as a way to bring yields down.