FXT Financial Focus (Asia-Pacific 08/25)Treasury Buybacks Fail to Ease Long-Term Yield Pressure

U.S. Treasury Secretary Bessent last week proposed expanding buybacks of longer-dated Treasuries while increasing short-term issuance, aiming to ease pressure on the long end by reshaping the debt maturity profile. Dubbed a Treasury version of Operation Twist, the plan seeks to reduce some long-term bond supply, improve liquidity and lower long-term borrowing costs. Bessent believes some Treasury yields have moved away from equilibrium levels and hopes debt-management tools can improve the yield curve.

Long-term Treasury yields fell sharply after the announcement, but the move was short-lived. As investors refocused on inflation, fiscal deficits and Treasury supply, yields quickly rebounded. The 10-year Treasury yield ended last week near 4.73%, close to its highest level since Bessent took office. This suggests the Treasury can influence short-term supply and demand, but has limited ability to reshape long-term rate expectations.

A bigger challenge comes from the continued expansion of U.S. debt, with one measure already exceeding $40 trillion, while other developed economies face similar pressures. At the same time, the AI investment boom is driving major technology companies to increase capital spending and tap bond markets for funding. Governments and corporations are therefore competing for long-term capital, keeping funding demand strong and making it harder for borrowing costs to fall.

Higher energy prices following disruptions from the U.S.-Iran conflict have renewed inflation concerns, while the policy direction of Fed Chair Kevin Warsh remains uncertain. Investors are therefore demanding higher term premiums to compensate for future inflation and policy risks. Even if the Treasury reduces some long-term bond supply, yields may remain elevated unless these pressures ease materially.

Major technology companies such as Alphabet have issued bonds with maturities extending several decades to finance AI and data-center investment. Bessent believes such spending could boost productivity over the long term, but may intensify competition for capital in the near term, leading him to suggest companies consider more five-year debt. Ultimately, however, firms will choose maturities based on their own financing costs, limiting the Treasurys influence.

This has prompted discussion over whether the Treasury is developing a form of backstop for the bond market. Compared with the Federal Reserve, however, the Treasury faces clear policy limits. Larger buybacks can improve liquidity and maturity adjustments can alter local supply-demand conditions, but neither can eliminate pressures from fiscal deficits, corporate borrowing and inflation.

From FXTs perspective, if fiscal deficits remain high, AI investment continues to drive corporate funding demand and elevated energy costs keep inflation sticky, long-term borrowing costs are likely to stay relatively high. Treasury buybacks and maturity adjustments may therefore provide only temporary relief. Persistently high rates could also weigh on housing, commercial real estate, corporate investment and government interest expenses. A sustained decline in long-term yields will likely require easing fiscal pressure, further disinflation or a slowdown in corporate capital spending.

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