Why investors aren't buying yet another attempt by the Treasury Department to calm the rattled bond market

By Isabel Wang

Back-to-back weak auctions for Treasury notes show that government repurchases haven't spurred demand for bonds

Treasury Secretary Scott Bessent's efforts to shore up the bond market have underwhelmed.

You can't bail out the ocean by using a bigger bucket. The Treasury Department has tried anyway - for the second time in just two weeks.

The bond market's relentless selloff intensified on Thursday, even after the Treasury Department ran its second buyback operation this month to support market liquidity. The yield on the 10-year Treasury note BX:TMUBMUSD10Y rose 5 basis points (0.05 percentage point) to 5.163%, its highest level since July 2007, according to Dow Jones Market Data. The 30-year Treasury rate BX:TMUBMUSD30Y climbed 5.9 basis points to 5.460%, its highest level in over 22 years. Bond prices and yields move in opposite directions.

Both of the benchmark longer-term Treasury yields have risen for three consecutive sessions. Another weak auction of Treasury notes certainly didn't help matters.

The Treasury Department disclosed that it bought back around $4.1 billion in long-dated government bonds on Thursday. That underwhelmed traders, given that the plan announced earlier this week was to buy back up to $6 billion.

It was the latest move in the Trump administration's plan to ramp up Treasury buybacks through early November as it seeks to stabilize a strained bond market. The first operation was two weeks ago, on Sept. 9, and saw only about $5.2 billion worth of Treasurys repurchased despite market expectations for a larger amount.

So far, neither of the interventions have moved the needle on the Treasury market, which is valued at more than $30 trillion. Longer-term yields were still hovering at nearly 20-year highs on Friday, with the 10-year rate up 40.6 basis points so far this month and the 30-year yield up 21.2 basis points during the same period.

"These buybacks are maybe trying to provide a little liquidity to the system, but they're not going to have the intent of potentially pushing yields lower," said Brian Rehling, co-head of global fixed-income strategy at Wells Fargo Investment Institute. "This is just some semantics more than anything, since it doesn't really have any meaningful impact on the market at all."

Longer-term Treasury yields, particularly the benchmark 10-year yield, directly influence how much American consumers and businesses pay to borrow, including on mortgages and car loans. The 30-year mortgage rate was climbing to above 7.3% this week, according to Mortgage News Daily.

Treasury yields began their surge in mid-August amid rising oil prices (CL00) (BRN00) resulting from the Iran war, a swelling federal deficit and massive artificial-intelligence-related debt issuance that pushed more supply into the bond market. As a result, investors demanded even greater compensation to hold government debt for a longer period, sending longer-term yields to levels not seen since before the 2008 financial crisis.

The Federal Reserve's decision last week to raise interest rates for the first time in three years did give investors some hope that a monetary-tightening cycle would help keep inflation in check, and yields eased slightly. But Wednesday's release of S&P Global's U.S. flash manufacturing data for September - which showed the fastest expansion since July 2021 - sent yields rising again as investors braced for potentially more aggressive interest-rate hikes.

All these factors show that the underwhelming buyback operation on Thursday is not a "saving grace," said Will Compernolle, macroeconomic strategist at FHN Financial. "This is just another bad piece of news which exacerbates a lot of the bearish sentiment around long-term Treasury securities."

More important, the bond market's reaction may suggest that the Treasury Department's actions are losing their influence. The problem isn't just that the government's buyback operations are poorly executed, according to market strategists - it's that they may be trying to solve the wrong problem.

Government buybacks can't create demand for bonds out of thin air, and they certainly can't tame inflation or slow the pace of federal deficit spending. These are the two forces actually driving the uptick in longer-term yields lately, and until they are resolved, no intervention from the Treasury is going to hold yields down for long.

"Maybe the buybacks can provide a little liquidity at the margin, but it's not going to change where yields are going," Rehling told MarketWatch in a phone interview on Thursday. "The bond market wants to see that inflation is being dealt with, whatever that takes, but yields are going to keep testing and keep putting in new highs, absent an abrupt end to the Iran conflict or a severe growth shock."

In a sign that buybacks can't boost demand, the Treasury Department's Thursday auction of 7-year notes BX:TMUBMUSD07Y wasn't well received. Even with yields on existing 7-year notes at the highest level in 19 years, the bid-to-cover ratio - the number of bids compared with bids accepted - dropped to 2.42:1, down from 2.51:1 in August and from 2.49:1 in July. That followed a poorly received auction of 5-year notes BX:TMUBMUSD05Y on Wednesday.

Treasury Secretary Scott Bessent earlier this month defended recent government interventions by stating that his position gives him "asymmetric information," or an unfair advantage regarding policy plans. He even declared, "I am the house now," and challenged traders to bet against him.

Unfortunately, the Treasury doesn't have the tool kit to match Bessent's "intense rhetoric," said FHN's Compernolle.

In an email response to a request from MarketWatch for comment, the Treasury Department said it is seeing particularly strong participation in its long-term bond buybacks, prompting it to increase the size and frequency of those operations to improve liquidity.

In other words, investors are eager to sell existing Treasurys back to the government through the buyback program. That's different from saying investors are eager to buy newly issued bonds from the government.

In Compernolle's view, the recent selling could still easily reverse if upcoming economic data contradict Wednesday's strong S&P manufacturing data.

"There is a possibility that whatever selling pressure emerged from the [manufacturing data] yesterday is going to reverse if we have economic data that refutes what we saw yesterday," he told MarketWatch via phone.

U.S. stocks were higher on Friday. The S&P 500 SPX and the Nasdaq composite COMP were each rising 0.3, while the Dow Jones Industrial Average DJIA was up 250 points, or 0.5%, according to FactSet data.

-Isabel Wang

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09-25-26 1017ET