Treasury’s bond buyback is a short-term fix to Washington’s $40tn problem
US government intervention to halt pressure on its Treasurys is a “temporary fix” which doesn’t address the real and intensifying issues, affirms the CEO of one of the world’s largest independent financial advisory organisations.
Nigel Green of deVere Group’s comments come as benchmark 10-year Treasury yields climbed back to 4.704% and 30-year yields rose to 5.252%, reversing much of the drop seen a day earlier when the Treasury Department said it would more than double its bond buyback programme.
The reversal came the same week gross US government debt passed $40tn for the first time, with net interest payments alone now projected to exceed $1tn this year, more than the government spends on every mandatory programme except Social Security and Medicare.
Minutes from the Federal Reserve’s July meeting, released the same day as the buyback announcement, showed officials leaning toward higher rates unless inflation progress improves.
The deVere chief executive says: “A government stepping in to buy its own debt is an admission dressed up as strength.
“It’s a temporary fix that doesn’t address the core problem.
“Buybacks can smooth a single trading session, and they did exactly that for a matter of hours.
“They cannot fix a borrowing position that has just crossed $40 trillion, and investors worked that out almost as quickly as the announcement landed.
“What we saw this week is a textbook pattern. Yields fell sharply within minutes of the intervention, then climbed straight back the following day once the market had time to think it through.
“This round trip tells you everything about how seriously bond investors are taking this kind of support.
“Interest payments on US debt are on course to outstrip spending on every major government programme bar two, a cost already showing up in this year’s budget rather than sitting in some distant forecast. Every additional basis point of yield adds to a bill the government is already struggling to cover without borrowing more to pay it.
“There is also a second pressure building alongside government borrowing that gets far less attention.
“Corporate America is issuing debt at a record pace to fund the AI build-out, with borrowing linked to data centre expansion now running into the hundreds of billions of dollars.
“Government and corporate borrowers are increasingly competing for the same pool of buyers at the same time, and that competition is a real part of why investors are demanding more compensation to hold long-dated paper.
“Central bank guidance is adding to the strain rather than easing it. The Federal Reserve’s own July minutes point to policymakers who are open to raising rates further if inflation does not cool.
“As we know, markets don’t react well to a fiscal authority intervening in bond markets and a monetary authority signalling further tightening in the same week.
“Investors are pricing in a government that may need to keep borrowing at exactly the moment borrowing is becoming more expensive.”
None of this means investors should panic or exit government bonds altogether, but the era of treating US Treasurys as a simple, risk-free anchor for a portfolio is fading.
Investors should consider pricing in the possibility of continued intervention, continued heavy issuance, and a government balance sheet under sustained strain, rather than assuming yields will settle back to where they sat a few years ago.
Nigel Green concludes: “Waiting for calmer conditions before acting is itself a decision, and this week has shown how quickly conditions can move in the other direction.”