I’ve been getting up to speed on how Treasury buybacks work, and my views on Bessent’s announcement to increase buybacks to at least $4B per operation have evolved. I found JPM’s podcast episode on Treasury Buyback Expansion and John Comiskey’s Treasury Model Update to be helpful.
The way buybacks work is that the market submits offers to sell Treasuries into the buyback operation, and the Treasury decides how much of the offers it wants to fill. Prior to last week’s announcement, the Treasury would only fill the best $2B of offers made, but that $2B ceiling is now a $4B floor. If the size of offers in previous buybacks is any indication of the size of future offers, then it should be noted that the most recent 20-30y buyback operations saw 19.9b, 21.9b, 30.5, 21.3b worth of offers (according to Comiskey). This means the size of Bessent’s larger buybacks could end up being in the range of $20b or more, way above the stated $4B floor.
JPM also points out that changes in buyback operations are normally announced during the Quarterly Refund Announcement. The fact that the increased buybacks were announced off-schedule by surprise is a signal that yields have reached a threshold that make the White House uncomfortable, and therefore intervention is necessary. This is a signal that changes the relationship between Treasury yields and the US dollar trade (and by extension, debasement trades like precious metals and BTC).
Prior to last week, higher yields meant lower gold and a higher USD. This was mainly due to fluctuations in the oil price - higher oil meant higher headline inflation and therefore yields, which would push the dollar higher on interest rate differentials and stagflation fears. The correlation has now flipped - higher yields will now invite further intervention by the Treasury (and perhaps the Fed), inflaming debasement narratives and pushing the dollar lower.
News also broke tonight that Bessent could choose to fund the Treasury buybacks from the Treasury General Account instead of by funding them with Tbill issuance. This means that Treasury buybacks would have a similar effect to QE, at least until the TGA becomes depleted and needs to be replenished with more Tbill issuance.
