The U.S. Treasury announced on Wednesday (September 9) that it would purchase up to $6 billion in long-term government bonds during Thursday's repurchase operation, three times the normal amount, and pledged that future regular repurchase operations would be no less than $4 billion. However, this much-anticipated expansion of the repurchase program instead triggered a further rise in long-term yields—the 10-year yield reached 4.8568%, the highest since November 2023; the 30-year yield rose to 5.307%, the highest level since 2007. The market interpreted this unusual reaction of "buying bonds leading to a drop in bond prices" as investors expecting more substantial intervention, but the actual $6 billion size failed to meet market expectations.

Details of the buyback program: $6 billion, three times the normal level

The U.S. Treasury Department said in a statement Wednesday that it will purchase up to $6 billion in outstanding securities with maturities of 10 to 20 years in a repurchase operation on September 10, three times the size of previous long-term Treasury repurchase operations. Future regular repurchase operations will remain at least $4 billion. This expansion of repurchases stems from Treasury Secretary Bessant's statement on August 19, when he announced the government would "at least double" the size of its regular repurchase operations of issued securities to address pressure from soaring long-term yields. 10-year and 20-year Treasury bonds are considered relatively illiquid in the market, and yields on these maturities had previously hit multi-year highs.

Market reaction: Bond buying leads to bond price decline; investors anticipate larger-scale purchases.

Although the repurchase program is ostensibly "buying bonds to support prices," the market's actual reaction has been contrary to this. The 10-year yield touched 4.8568% intraday, the highest since November 2023; the 30-year yield rose to 5.307%, the highest since 2007; and the 20-year yield briefly climbed to 5.314%. The managing director of Mischler Financial noted, "People expected the repurchase to exceed $6 billion. The result was disappointing, hence the decline in bond prices and the rise in yields." A BNP Paribas US interest rate strategist stated before the announcement that a repurchase ceiling of $7 billion would be a surprise to the market, and any size below that could trigger selling pressure. PGIM's chief fixed income investment strategist analyzed that the market expected a repurchase size between $6 billion and $10 billion, while the Treasury's actual announcement was "at the low end of market expectations," thus causing a negative reaction in long-term yields.

Why are market expectations so high?

The previous announcement of expanded repurchase agreements sparked much speculation in the market regarding the extent of intervention. Some market observers believe that, given former Treasury Secretary Paulson's "bazooka-like" interventions during the financial crisis, Bessant's version of the repurchase program could be several times larger than the initial one. Bessant reiterated on Tuesday that while it cannot change the "equilibrium" price of U.S. Treasury bonds, the goal is to mitigate market volatility and prevent narratives that could potentially harm the U.S. Treasury market from gaining traction. However, $6 billion is a negligible amount relative to a $31.8 trillion Treasury bond market (the publicly held portion), raising questions about the Treasury's commitment.

The auction of 10-year Treasury bonds was unexpectedly strong: the winning yield was 4.834%, and demand was the strongest since 2019.

Despite the disappointing repurchase announcement, the $39 billion 10-year Treasury auction held on the same day unexpectedly attracted strong demand. The bid-to-cover ratio was 2.71, the highest since 2019; the winning yield was 4.834%, more than 1 basis point lower than the pre-auction market yield. Market analysts believe that one reason for the enthusiastic participation of investors was the expectation that the Treasury would repurchase 10- to 20-year Treasury bonds on Thursday, which they considered "potentially a risk-free transaction"—that is, buying new bonds in the primary market and then quickly realizing the value through the Treasury's repurchase operation in the secondary market. The $58 billion 3-year Treasury bond auction on Tuesday also received solid demand, and $22 billion in 30-year Treasury bonds will be auctioned on Thursday.

Macroeconomic backdrop for a weakening bond market: oil prices break $100, inflation rises, and the probability of an interest rate hike reaches 60%.

The macroeconomic backdrop for the continued rise in US Treasury yields is quite clear, with multiple factors converging to exert sustained upward pressure on long-term interest rates: A surge in debt: The total US national debt recently surpassed $40 trillion, with publicly held debt reaching $31.8 trillion, an 8.2% increase from 2025. Renewed inflation concerns: Trump's tariff rhetoric, the US-Iran conflict, and oil prices breaking $100/barrel for the first time since July have exacerbated inflation expectations and increased the probability of a rate hike: Federal funds futures traders are pricing in a roughly 60% probability of a 25 basis point rate hike by the Fed next week. LPL Financial's chief fixed-income strategist stated, "Inflation is becoming more entrenched, which could prompt the Fed to raise rates."

Controversy arises: Is intervening in prices wise?

Expanding the repurchase program has also faced criticism from the financial community. In a commentary in the Wall Street Journal, prominent investor Stanley Druckenmiller warned, "Once the market believes the Treasury is defending a certain price, every rise in yields becomes a test of official resolve, and repurchase operations must continuously expand to withstand these tests." He added, "The government has never won a price defense against fundamentals; the only variable is how much money was spent before conceding." Economists at Nomura Securities pointed out that the Treasury's announced repurchase program was smaller than market expectations, but the risk lies in the possibility that the Treasury might further increase its efforts in response to market reactions. However, they believe that the pressure to break standard operating procedures will ease after the midterm elections.

Summarize

The U.S. Treasury expanded its long-term Treasury bond repurchase program to $6 billion (three times the normal level) and pledged that future regular operations would be no less than $4 billion. However, the market reacted unusually to this expanded repurchase program, with bond purchases leading to a decline – the 10-year yield hit a high of 4.8568% since 2023, and the 30-year yield rose to 5.307%, the highest since 2007, as investors had anticipated more aggressive intervention. The market will now focus on the actual implementation of the repurchase program on Thursday, the U.S. CPI data on Friday, and the Federal Reserve's policy meeting next week. The $6 billion repurchase program, relative to a market of $31.8 trillion, has more symbolic than practical significance; the true direction will still depend on inflation data, oil price movements, and the Federal Reserve's policy decisions.