US Treasury ramps up bond buybacks; J.P. Morgan warns of delaying tactics

The U.S. Treasury is stepping up its efforts to support the bond market by expanding its buyback program for long-term debt. Treasury Secretary Brian Deese announced on Tuesday that the department would "create a market" for long-term bonds experiencing yield spikes, with each operation potentially exceeding $4 billion.

This announcement follows the Treasury's earlier decision to double its planned buyback size for long-term bonds to $2 billion on Monday, which led to a significant drop in long-term bond yields. Deese indicated that the buyback size would be further increased, emphasizing that decisions would be based on market conditions. He stated, "We have a lot of tools that we can use, so stay tuned. Part of the message here is that we think the yields do not reflect the underlying fundamentals."

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We will be increasing the buyback size, meaning that each operation could exceed $4 billion.

However, J.P. Morgan analysts expressed skepticism about the effectiveness of these measures. James Sullivan, co-head of J.P. Morgan's fundamental research, likened the strategy of buying back long-term debt while issuing short-term Treasury bills to "using a credit card to pay your mortgage." He argued that this approach only temporarily alleviates pressure without addressing the fundamental debt burden.

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This is a bit like using a credit card to pay your mortgage. It might work in the short term, but eventually, this mismatch will become increasingly apparent.

Sullivan suggested that this refinancing of long-term debt with short-term borrowing might be feasible in the short run but will eventually reveal its unsustainability. Analyst Maia Crook added that the intervention "ignores underlying structural challenges" and risks increasing the risk premium as the market perceives Treasury's intervention as a deviation from predictable principles.

Meanwhile, U.S. national debt has surpassed the $40 trillion mark. Deese acknowledged this figure, stating that it is not "magical" and can be managed through economic growth. He also mentioned plans to meet with Office of Management and Budget Director Russell Vought to discuss "fiscal consolidation."

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The intervention ignores underlying structural challenges, and the longer-term implication is potentially a higher risk premium that reflects Treasury's market intervention and moves the market away from 'normal and predictable' principles.