Treasury’s Push to Cut Long-Term Yields Sparks Wall Street Fears of Market Backlash

The traditional U.S. formula for interest-rate policy is starting to fray. The Federal Reserve sets the target range for its policy rate, while the market determines long-term yields. But with the White House pressuring the Fed, communication narrowing and debate persisting over the inflation response, the Treasury Department has moved to steer long-term yields lower by adjusting the maturity profile and supply of government debt. The shift has raised fears in the market of a Treasury version of quantitative easing.

CNBC reported on Aug. 24 that the Treasury is considering a plan to use about $940 billion in its Treasury General Account, or TGA, for buybacks of long-dated Treasuries. If the buyback program expands, the supply of long-term Treasuries in circulation would shrink, potentially pushing prices up and yields down.

After long-term Treasury yields climbed to their highest level in 19 years, the Treasury said on Aug. 20 that it would increase buybacks from $2 billion to at least $4 billion. That announcement was followed by Treasury Secretary Scott Bessent’s remarks threatening investors who were selling Treasuries, and then by the report that officials were weighing use of the TGA. Together, the moves fueled a market view that the Treasury, rather than the Fed, had stepped in as the new fixer on rates.

Concerns about the policy outweigh expectations for its benefits. Long-term U.S. yields have risen as the risk premium tied to swelling national debt and fiscal deficits has increased. On Wall Street, many see the Treasury as doing little more than pressuring the market with a short-term fix. Citigroup wrote on Aug. 24 that even if the Treasury conducts buybacks, it would still have to issue debt in the end if it wants to reduce the deficit.

Some investors fear that repeated extraordinary measures would weaken policy credibility and predictability. If market participants have to account for unexpected changes in debt issuance, they may demand a higher premium to buy long-dated Treasuries. Stanley Druckenmiller, chairman of Duquesne Family Office, said artificially suppressing interest rates increases risk. A government that tries to defend prices against fundamentals always loses, he said.

Another source of concern is the potential mismatch with the Fed. The backdrop is unusual as calls have been growing inside the central bank for higher benchmark rates to curb inflation, even as the Treasury tries to hold down long-term yields. Attention is now focused on the Fed’s annual Jackson Hole symposium in Wyoming on Aug. 27-29.

Hwang Jung-soo, New York correspondent, Korea Economic Daily hjs@hankyung.com