The Treasury Department is buying back long-dated bonds to push yields lower, but the 10-year Treasury yield sat at 5% on Sept. 18 anyway. A Sept. 9 buyback operation failed to steady the $32 trillion bond market, mortgage rates have already climbed, and stocks could also come under pressure.
The Treasury said in August it would at least double its long-bond buybacks to $4 billion or more each through Nov. 4, yet the 10-year Treasury yield reached 5% on Sept. 18, up from just below 4% before the U.S. and Israel launched the Iran war in late February. Treasury Secretary Scott Bessent is trying to buy back debt to keep yields lower, but the pressure pushing them higher hasn't let up.
Buybacks collide with a widening deficit
Per Bloomberg, Treasury's Sept. 9 announcement of a $6 billion buyback operation failed to steady the bond market as oil prices surged. Before that, in August, CNBC reported that investment strategists blamed the long-bond sell-off underway since June on the government's growing budget deficit, persistent above-target inflation, and a high level of ongoing corporate borrowing. In other words, lenders are demanding extra compensation because their dollars will buy less in the future, and buybacks alone don't address that.
Mortgage rates and stocks face pressure
Mortgage rates tend to track the 10-year Treasury yield, and Freddie Mac data put the average 30-year fixed rate at 6.95% on Sept. 18. On Sept. 16, the Federal Reserve raised its benchmark federal funds rate by a quarter point, its first hike in three years, and yields eased slightly the next day to 4.94% on the 10-year note. Buybacks can't offset a rising policy rate, though, since they target long-dated bonds while the Fed sets short-term rates. Higher yields also make bonds look more appealing next to stocks, so money moving into bonds tends to pull it out of equities.
Investors are now watching the Nov. 4 refunding update: if the Treasury enlarges its bond market buybacks again and the 10-year yield still holds near 5%, borrowing costs will likely keep climbing.
Source: Motley Fool (via Yahoo Finance)
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