Treasury will buy more government bonds than previously announced. The market remains 'underwhelmed.'

By Robert Schroeder and Greg Robb

Size of planned operation rises to $6 billion

The Treasury Department said it would buy back $6 billion in U.S. government debt, exceeding the amount previously announced in its effort to contain bond yields.

This is the first buyback operation since Treasury said last month that it would at least double the size of its government-debt buybacks from $2 billion. The new figure is below the top range of expectations.

Under the operations, the Treasury buys older, less active bonds in the open market, and short-term debt takes its place. Buying back less active long-term securities can, at the margin, raise the price of remaining bonds and lower their yield.

Many Wall Street dealers expected the Treasury to announce buybacks in a range of $6 billion to $8 billion.

"The market seems to be underwhelmed," Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management, said in a call after the announcement.

Robin Brooks, senior fellow at Brookings Institution, said the Treasury was trying to signal with $6 billion in buybacks that it not trying to manipulate markets.

"This begs the question of: Why do the action in the first place? Treasury could have stayed out of this," Brooks said in an interview.

Last month, Treasury Secretary Scott Bessent surprised markets with the expanded buyback plan, which he said was a response to the steep rise in 30-year Treasury yields BX:TMUBMUSD30Y.

The surge in 30-year Treasury yields eventually hit a 19-year high of 5.34%. Bessent said the move didn't reflect fundamentals and that traders had "bad information."

"We are trying to keep the market in equilibrium," Bessent said.

Bessent has increasingly taken activist measures over the past month, and recently intervened to support the Japanese yen (USDJPY).

There seemed to be some expectation of a "shock and awe" move from the Treasury, given the lead-up to the announcement.

However, with no additional guidance on further buyback operations, this likely will add a little more volatility to the market, said Lorizio. He called it a "learning moment" for the Treasury, particularly if it wants to provide a sort of cap on yields.

"The market is telling us this size of purchases didn't achieve it," he said.

The actual buyback operation will take place on Thursday.

Analysts trace the sharp rise in bond yields to the aftermath of the Federal Reserve's July policy meeting.

Many bond traders had expected the Fed to hike rates at that meeting after new Federal Reserve Chairman Kevin Warsh's tough talk on inflation. But the Fed did not change rates, and Warsh mentioned he might support changing how the Fed measures inflation.

Long-end yields have stabilized after Bessent's surprise announcement and Warsh's Jackson Hole Economic Policy Symposium speech, where the Fed chairman pledged to maintain the current measure of inflation and signaled he might favor a rate hike as soon as this month.

"In effect, the program has reduced long-term U.S. debt supply and increased supply of shorter coupons, which means the program is not reducing yields in general, but it is reducing some yields at the expense of others," Chris Low, chief economist at FHN Financial, said in a note Wednesday.

Analysts say the best way for Treasury to manage long-end supply is to cut the issuance of longer-term bonds. That could happen at the Fed's next refunding announcement in early November.

The benchmark 10-year Treasury yield BX:TMUBMUSD10Y edged up to 4.84% Wednesday, a day after it touched a new one-year high. The Treasury announcement comes ahead of a new $39 billion auction of 10-year notes.

Adam Posen, the president of the Peterson Institute for International Economics, said Bessent's posturing was ill-advised. In an interview on Bloomberg Television, he said that either the intervention works by weakening the dollar DXY, which will boost domestic inflation, or it doesn't and the U.S. looks impotent.

In a separate announcement, the Treasury stuck to its prior statement that the last six buybacks of long-term debt before the next round in early November would have a maximum purchase amount of $4 billion or more - not today's amount of up to $6 billion.

Joy Wiltermuth contributed.

-Robert Schroeder -Greg Robb

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09-09-26 1527ET