US Treasury's Intervention Fails to Control Long-Term Rates... "A Crisis May Ultimately Arise"

[By Myung Jeong-seon, Block Media] The US Treasury has introduced a buyback expansion strategy to stabilize the long-term Treasury market, but the market's reaction has been limited. The yield on 30-year US Treasuries remains near its highest level in 19 years, while the 10-year yield is also hovering near a one-year high. Analysts point out that unless the US's national debt, which has reached $40 trillion, and its large fiscal deficit are fundamentally addressed, it will be difficult to suppress long-term rates with short-term liquidity measures alone.

Treasury Secretary Scott Vessenet recently stated that the Treasury would expand long-term Treasury buybacks and utilize additional market stabilization measures. However, the rise in interest rates, which had eased immediately after the announcement, reversed within a day. The market is watching closely to see if the Treasury will implement stronger measures to prevent a surge in long-term rates.

30-Year Yield at 5.276%... Buyback Effect Reversed in a Day

According to MarketWatch and others on the 23rd (local time), the yield on 30-year US Treasuries recorded 5.276% on the 21st (local time), remaining near its highest level in 19 years. The yield on 10-year Treasuries is close to a one-year high at 4.737%.

Bond prices and yields move in opposite directions. The fact that long-term rates remain high indicates that the buyback expansion plan announced by the Treasury has not calmed market anxieties.

Secretary Vessenet has announced plans to increase the scale of long-term Treasury buybacks this fall and to support the market using various policy tools held by the Treasury. Additional measures to reduce the fiscal burden on the US government have also been hinted at.

However, market confidence has not yet fully recovered.

Tracy Chen, a portfolio manager at Brandywine Global, stated, "Secretary Vessenet has failed to suppress long-term Treasury yields," adding that the movements in the bond market indicate that the so-called 'bond vigilantes' do not yet trust the Treasury.

The rise in long-term rates is not just a Wall Street issue. Since they serve as benchmarks for long-term financing costs such as US mortgage and auto loan credit card rates, they can directly impact households and businesses. The government also faces increased fiscal burdens as the cost of issuing Treasuries rises.

$1.8 Trillion Fiscal Deficit... Buybacks Cannot Fundamentally Solve the Issue

The problem is that while the Treasury's buybacks may improve market liquidity, they do not address the underlying debt issue in the US.

The cumulative fiscal deficit of the federal government for this fiscal year has already reached approximately $1.8 trillion. The government must continue to issue Treasuries to cover this deficit.

Even if the Treasury buys back long-term Treasuries, it is likely to increase the issuance of short-term Treasuries to raise funds. As a result, while there may be an effect of changing the maturity structure of Treasuries, it does not reduce the overall borrowing demand.

The US national debt stands at about $40 trillion. Additionally, the net interest cost for the fiscal year 2026 is expected to exceed $1 trillion. The longer high interest rates persist, the greater the interest burden the government will have to bear.

John Arnold, founder of Arnold Ventures, stated, "It is reasonable to expect that a crisis will occur at some point." He is a former star energy trader from Enron and currently runs a charitable foundation.

Arnold believes that the recent instability in the bond market may be temporary and could stabilize again. However, he pointed out that if the current situation persists without changes to the US fiscal structure, it could ultimately lead to a crisis.

Dustin Reed, chief bond strategist at Mackenzie Investments, also noted that in the context of rising long-term rates, "more measures are needed, and there is a possibility that actual additional responses will emerge."

Tax Cuts and Fiscal Austerity Are Not Easy... Political Burden Before Midterm Elections

To reassure the market, the Treasury needs to signal that it will reduce the fiscal deficit itself, beyond just buybacks.

However, in reality, this is not easy. Tax increases to boost revenue or austerity measures to cut spending carry significant political burdens ahead of the midterm elections in November.

Chen, the portfolio manager, believes that Secretary Vessenet should take more actions to show that the Trump administration is serious about solving fiscal issues. However, she assessed that it would be difficult to push for tax increases or austerity measures ahead of the elections.

High oil prices and increased military spending are also variables. The expansion of military spending due to the Iran war and high oil prices are reigniting inflation concerns. If inflationary pressures increase, policies aimed at lowering long-term Treasury yields may face constraints.

Thus, the issue of long-term rates in the US is seen as a structural problem intertwined with fiscal deficits and inflation concerns, rather than simply a lack of liquidity in the bond market.

Treasury Says "Lower Rates" Fed Says "Watch the Market"... Conflicting Signals

The subtle divergence in policy messages between the Treasury and the Federal Reserve (Fed) is also increasing market uncertainty.

The Treasury, led by Secretary Vessenet, is clearly demonstrating its policy intent to suppress rising long-term rates. Both the expansion of long-term Treasury buybacks and the mention of additional policy measures are aimed at lowering borrowing costs.

In contrast, Fed Chair Kevin Warsh emphasizes that market prices should serve as important signals for determining policy direction.

Chief bond strategist Reed analyzed that "the Treasury is saying there are liquidity issues in the long term, but Chair Warsh wants to see what the market is reflecting in its pricing," indicating that the two institutions are sending different messages.

As a result, what Warsh says at this week's Jackson Hole Economic Policy Symposium has become crucial.

Daniela Haysen, chief market analyst at Capital.com, predicts that if Warsh discusses ongoing inflation and the recent rise in long-term rates, as well as the future size and role of the Fed's balance sheet, there could be significant price adjustments not only in US Treasuries but also in the dollar and gold stock markets.

Will the Market Ultimately Be Stronger Than Policy?... The Next Card is "Greater Intervention"

Currently, the market's attention is focused on what additional cards the Treasury will play.

Expanding buybacks can facilitate trading in the long-term Treasury market and help alleviate supply-demand imbalances in specific segments. However, as long as the US government maintains a large fiscal deficit, the structural need to continue supplying new Treasuries remains unchanged.

Ultimately, to sustainably lower long-term rates, there is a need to restore confidence in fiscal soundness alongside managing market liquidity.

There is also a possibility that the Treasury may further expand the scale of buybacks or adjust the maturity structure of issuances. Some market observers suggest that if policymakers genuinely aim to suppress rising long-term rates, they may consider more direct market intervention measures.

However, the greater the intensity of intervention, the higher the likelihood of conflict with the Fed's monetary policy. Especially in a situation where inflation is not fully under control, if the government intensifies efforts to artificially lower long-term rates, it could actually exacerbate concerns about fiscal stability in the bond market.

Ultimately, the key variable in the US Treasury market is not how many Treasuries Secretary Vessenet buys back, but how the US government manages its $40 trillion debt and the recurring large deficits each year. Given that recent market interventions have not prevented the rise in long-term rates, the US bond market appears to be entering a phase that tests both the Treasury's next response and the Fed's messaging.

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