US Rates: Treasury Buyback Expansion

Welcome to JP Morgan's at any rate podcast series. In this episode, we will be discussing the US Treasury Department's stated plan to expand its buyback operation and how it might be interpreted. Now for your host and head of content strategy here at JP Morgan, Samantha Ezerello. Welcome everyone to our US Treasury buyback expansion call. I'm Sam Ezerello, I lead content strategy for global research and I'm joined by Jay Berry, global head of rate strategy. And we put this call together last minute to talk about the breaking news from yesterday. Jay is going to refer to a report he released yesterday night. We're going to ask him a few things and then we're going to go to client Q&A. So Jay, exciting times. Let's start with an overview of what happened yesterday. May you live an interesting time. Yeah, so I think very shockingly yesterday, Sam, the Treasury Department around 830 in the morning announced that it was going to increase the size of its long end by that operations beginning in the beginning of September, such that will double the size of each operation in the 10 20 year bucket and the 20 to 30 year bucket from a 2 billion maximum to at least a 4 billion maximum, which should result in for the balance of this quarter and additional 14 billion of buybacks in the curve on an annual on a quarterly basis. They've been hitting everything. It'd be like an additional 16 billion and doubling of sizes or an annualized number of like 64 billion. And that seems pretty small in the context of how much the Treasury Department issues overall and at the long end of the curve every month and every year. But the signaling is what matters here in the timing of it because it is extremely unusual for the Treasury Department to make a debt management strategy announcement outside of its quarterly refunding announcement process. And I think as most of the people on the webinar knew in the room, no, the last of those was two weeks ago and that time decided to keep its buyback operation sizes completely unchanged. So that is highly unusual. The only other time I can remember that wasn't the financial crisis where the Treasury made announcement off cycle was back at the beginning of 2020 before COVID when the Treasury announced that it would be reintroducing the 20 year bond back for auction, but on a forward basis months later. So this is highly unusual. The Treasury Department gave reasons that it had seen, I want to make sure I get the verbiage correct, strong and consistent offers into these operations which warranted more sizing. But it's very interesting that when we see that, like I don't know if this is going to see that under the surface. So that's the announcement that was made the long end of the Treasury curve, obviously rallying, nine basis points in response, but it's given it right back today and basically yield levels and I'm cognizant for everyone on the webinar that we said the 30 year tips auction seeing what happened there. But we're back to where we were before this all began basically. Okay, so you already started to allude to it and you wrote about it in the report. The US Treasury market daily, what do we think is the intent? What are we interpreting the Treasury's aim as here with this? So I think in essence coming at the time when it did, you know, let's take a step back and examine what is the buyback program intended for and how does the Treasury side how it should scale it up or scale it down? The buyback program and these liquidity support buybacks have been intended to address pressures and off the runs and make sure that the off the run market in Treasuries less liquid, less recently issued securities trade with liquidity and allows this to take inventory off of dealers, hands, age, inventory so they can continue to market, make and hold inventory that's less aged. That's the intent of the program. The program is not intended to transform the maturity structure of the Treasury's debt issuance. So that's a very important point. And then fortunately about a year ago, the Treasury Barring Advisory Committee, the Treasury's group of private sector advisors who help it on kind of structural and near term debt management issues did some work on the buyback program and whoever presented on this came up with a stylized buyback score saying this is how you should consider whether to size them up or size them down. And so there's three factors we should be able to watch here in order to glean how we should change this program. The first is the ratio of offers into each the offer to max ratio for buybacks, which the higher that ratio is, the greater the sign that there are more bonds and more participants offering securities into buybacks and could warrant a larger operation or more frequent operations. The second is looking how off-the-run securities are functioning and trading. And the way they decided to sort of look at that is through the lens of the root mean square error relative to a fitted curve. So how dispersed are off-the-run securities to a par curve of uniform liquidity? And then the third is a preference versus a preference for or how much of a discount are off-the-runs trading at relative to on-the-runs. And when we look at those three factors, none of those three factors indicate that they should have made a change to the buyback program at this point. The offer to max ratio has been pretty stable actually been coming down the dispersion along the fitted curve in both a 10 to 20 year bucket and the 20 to 30 year bucket is basically at multi-year lows. And I think anecdotally what we hear from more relative value participants in the market have been voting the lack of opportunity set up there because the lack of dislocations. And then finally we don't see evidence that near off-the-runs are trading at a significant discount relative to their on-the-run counterparts. So an aggregate those stylized buyback scores are very much at average levels. So the buyback program was intended to address this but we don't see any evidence of any need to. So what's the read through here is yields have continued to rise since the August for funding. And now 30 yields and aggregate have risen about 40 basis points over the last few weeks. But let's just be fair. This is just not not just a U.S. phenomenon. So I think there is growing discomfort with the level of yields. We know this administration and this treasury secretary have had a desire to lower interest rates. And that has been more challenging over the last six months because the markets have gone from pricing in 70 basis points of expected fed easing to pricing in about 40 basis points of fed tightening. And that's driven most of the move in interest rates. But on the layer on top of that at the long end of the curve I think there's also a read through that global capital flows matter. And if we'd sat here a decade ago I would have said low and negative yields globally were acting to anchor treasury yields because treasuries and U.S. fixed income looked attractive to foreign investors on a local currency partially hedge basis just the opposite's true right now. So when global yields move higher it's got an impact to move the U.S. And we know that the long end of the end curve has been moving significantly this year we find that's a departure. So with the read through for me this announcement yesterday alongside the very curious change of the treasury department made to its guidance at the August we're funding two weeks ago as well as the intervention that was done in year OEN all reads that they're attempting to sort of stem the tide here in long term rates perhaps until they see more decisive action on the monetary normalization size from the bank of Japan. So I think it all comes down to discomfort with rate levels knowing that the Fed is not I wouldn't say being uncooperative but sees no reason to cut rates. And the other fact is global you're appointing higher rates as well. So I think it's an effort to make good on this knowing that we have the midterm elections in two and a half class. So then a corollary question is if we think about buybacks under that debt management umbrella what are buybacks in your view or at least historically capable of doing and not capable of doing the respect of new dynamics in the treasury market. Yeah I mean I think it's important to distinguish treasury buybacks from Fed operations and in my mind these buyback operations are targeted at you know I wouldn't say reducing stress in the off-the-run market but helping off-the-runs trade more liquidly and also again what I mentioned before is to the extent that primary dealers own inventory of longer duration treasury securities and that inventory ages over time this will allow them to get more aged inventory of their balance to continue to animate and warehouse other securities. So I think it's aimed at that and the sizing is such words not big enough to materially impact rate levels because if we look at it again and aggregate sizing at the long end of the curve or an aggregate in the scope of a treasure department that on a gross base in this use close to five trillion securities per year in the coupon space and a 31 trillion dollar market is rather limited. So the attempt kind of really moves the needle on the average maturity in the market that's not the intent of the program. I think it's intended to help smooth functioning in the market because yes the treasury's only goal is to issue in primary but it cares about the whole ecosystem of treasure securities overall and knowing that off-the-runs make up by and large most of the treasury market. I think that's the intent and you know we've heard the argument from investors that the treasury effectively has unlimited sire power with this program because it's been basically buying back off-the-run securities and funding that with issuance of treasury bills. They could do this under an unlimited fashion. The theoretically that's true but we know that the T bill share about standing debt has been on the rise for the last few years and it is at a relatively high share now considering we're still in an economic expansion. That maybe warranted because knowing the dollar is the reserve currency and bar and exchange reserve manage like the old short duration treasure securities is helpful. We have a very large money market fund industry in AUM has been growing but the value proposition for treasury and issuing T bills is that it can lean on the heavily in times when its funding needs change mainly recessions. So there tends to be elasticity of demand and elasticity of pricing. It's just my fear here that the starting point with the T bill share at levels that we typically don't see except in recessions. The next time you need to sort of lean on the T bill market for an increased issuance in the next recession, you may not have the same benefits. to go out of the past. - I mean, what you're describing to me is a very complex system with many parts and factors, so it isn't as easy as pull one lever and the variable you want to move will move in the direction you want. - Yes, I think that's, you said it worked. - Particularly, and simply like I'd say. - Well, the next question for you was gonna be around market reaction. So it's not about over-analysing any moves. You already alluded to the move yesterday. We've seen a move today. I guess I wanna ask you then around what investors are really responding to here? - Yeah, so again, I think investors look through this and they understand the signaling is important and that's why we grow out yesterday, but I think taking a step back, they understand that if it did the administration want rates lower, this is a step that can be taken. Does it run the risk that they could take more aggressive steps and perhaps cut long into auction sizes, yes. But the bigger issue here that we've been grappling with and fiscal hasn't been a part of the conversation for over a year in the US because budget deficits have been stable, but stable at 6% of GDP. So if you're going to take action on this, it needs to be accompanied by some sort of fiscal consolidation. And I think investors with what they've seen here with rates going back to where they were are saying we don't see the fiscal consolidation. And by the way, the level of rates yesterday prior to this announcement wasn't exactly out of line with fundamentals considering what we know. So my concern over the medium term was this would bring fiscal back into the line light given the announcement yesterday. Anything Jade want to add on the broader approach to debt management that the Treasury is taking? - Yeah, listen, like I think the Treasury Department is tasked with funding the government at the lowest cost in taxpayer over time. - It's also tasked with being regular and predictable. And it's argued that one can argue this is the dual mandate that it has has allowed it to be the largest issue of government bonds globally and that this regularity and predictability allows it to get by with issuing at less than a discount considering our debt to GDP ratios. With what happened yesterday, I think you can argue that this is a little bit of a move away from regular and predictable in that fashion. And the reason that matters to me is if there's no corresponding fiscal action taken, markets could view this to be lacking credibility. So that the debt management strategy facing there is like, you know, you're leaning in the direction of the lowest cost to the taxpayer over time, which is short term good. But you're kind of losing a little bit of regular and predictable to go alongside it. The other thing I think to say is, you know, this shift from long end issuance to Treasury bill issuance, which is what these by-back operations are doing. The term also runs a very quantitative framework for debt management as an optimal debt framework. More basically, it makes the point right now. It should be issuing in the intermediate sector of the curve. So broadly speaking, in the five to seven-year point, that's the best place to minimize your role of a risk, best place to minimize the variability of your interest expense over time. It's also said, hey, we should actually be issuing less of the long end. So we can take with what was done yesterday, some understanding of why they may want to do this. But this same optimal debt framework also says you should be issuing less of the short end. So you're getting one half of the equation right and one half wrong there. So to me, like the things that are important with respect to debt management, we're losing a little bit of regularity and predictability. We're also potentially dispensing with the advice given by its subset of private sector advisors. And then finally, that you're only listening to one half of what your own quantitative framework should be saying you're doing with respect to debt management. - And I don't want to simplify it too much or make it overly philosophical. But if you thought of a yield as a market metric or a rate as a market metric, is there something to be said? Because you wrote about it in the report that there might be somewhat a divergence from the real drivers on the long end right now. The Treasury Secretary has obviously undersported that tremendously. Is there some justification there? You can see with the long end being a bit wonky? - Well, so again, I think there are global factors where it could, Sam. And I think Japan is a key factor there. It's worth maybe 20 basis points though. So yes, it's worth something. But you as the debt manager of the large discovery and bond market in the world, like is something like 20 basis points that should be focused on when it's kind of exogenous to what's happening and probably requires more aggressive monetary action from them to take that on. Yeah. - Around auctions. You mentioned auctions earlier and there was one happening right now. Do you think this changes issuance strategy going forward or will it have to make it? - So again, I think between this announcement yesterday and then the small change to the Treasury's forward guidance back two weeks ago where it no longer said future increases in Treasury coupon auction sizes and sets of future changes. It seems like it's trying to open up the distribution towards more aggressive changes to the debt management strategy which could involve actually reducing long end auctions. So I think you run the risk on that actually happening given the evidence of what we've seen over the last two weeks right now. I think there is a by-line that this could have a powerful impact. Should you take action to do so? But I think the body of evidence that we have seen globally from other debt management offices that have acted similarly is of while there's an announcement effect. And on the day of this announcement, long end yields may decline, the yield curve may flatten and we've seen this in the UK with the first time it didn't fall of 2022. So that needs successive announcement after that. There's a reversal in the half-life of these announcements are relatively shorter. So again, I think it just goes to the notion that the debt management side matters for eight levels but the fundamentals and the fiscal side matter more. - Okay, and then one more question for you, Jay, and then we'll turn to client questions. So please start to put them in if you haven't already. Let's say we're sitting in this exact same room six months from now. I was kind of curious to think you'll get your view on with what would determine whether this was a meaningful turning point for the treasury market or maybe just a short-lived market event we're talking about this week. - I know, that's a big question. - And very open-ended as well. - Flomix-based. - I mean, I don't think the rate, the level rates in itself. Like, can you look at the level of swap spreads as some sort of indication perhaps because we know the primary driver of the term structure of interest rates in the treasury market is monetary policy and expectations. And yes, that transmission mechanism, the clients as you go through the curve, but I think perhaps the level of swap spreads, but I think if we're sitting here six months from now, whether it's been impactful or not, as whether it's followed on with any sort of fiscal consolidation to go alongside it. Those would be how it would be perceived to be whether it's just a flash of the pan and just an attempt to stem the tide of raising rates or whether it's the beginning of a shift in focus for what has been running deficits that have been historically large as a share of GDP, given where we are in the economic cycle. - Okay. So we are now going to take a look at client questions. So having the computer handed to me, thank you. And just to be clear, no one can see your questions. So feel free to put them in. Should we start with this one? - It is. - Okay, so given the market sort of lack of reaction to the buy-back announcement, if Treasury decides to cut back on auction sizes, do you see that having any sustainable impact on yields? If that doesn't work, what are the more realistic options to bring the borrowing rates down? - No, I think that's a great question. And I tried to touch on it briefly, but again, I think if it were to take more aggressive action and cut auction sizes, I do think there would be a sizable impact on that announcement. That's not the perfect carlery, but in 2001, when we were running budget surpluses, and there was a risk that the Treasury market was actually going to disappear, the Treasury Department unexpectedly, and this was funding announcement day, decided to discontinue 30-year bond issuance. In a 30-year bond, that day rallied by, I think five points and another couple more points in the following days. So 7% rallied along into the curve. So there's an impact there. I think there's evidence again that when we look at the UK and what it did in the wake of its LBI crisis four years ago, that when it announced that in the wake of the dislocations occurred, it lowered long and yielded, and flattened the yield curve considerably as well. So I think if you were to take that step, there would be an impact that would be decisive on the day of the announcement and perhaps following through in the days after. But again, don't think it would be lasting because the evidence of what we've seen from other debt management offices is that that ended up reversing the number of days, weeks, months later. And then every time it's successfully used after that, it seems to be less impactful. So I think it could be, but I think you only use this if you really need to. Like I think you need to use this, if you feel like there's a dislocation of the market that is inconsistent with fundamentals, which is hard for me to see that right now. - I mean, that's what I was thinking, whether it's FX rates, it seems, or commodities, it seems expensive to intervene in markets in this way. - Yeah, I mean, I think I'm not an intervention expert by any means because we haven't seen intervention like this in the treasury market in the past. And I defer to my colleagues in FX research on that, but the case that they make, 'cause intervention can, I think temporarily help stem the momentum, but not change fundamentals. And that's how I would view what was announced yesterday, too, that it could be impactful, but fleeting and not lasting, unless accompanied by the right fundamental changes. - Okay, so we have another client question around the treasury secretary who was on CNBC today and was making comments there. And he made a reference to the fact that the buybacks could be more than four billion. So any comment on that in terms of size, impact from size, what that could look like. You know, I think if, you know, I think more. it's comprehended what was said in yesterday's announcement that the doubling of those minimums wasn't just that. A minimum of the maximum, so to speak. So I think market's understanding, it could do more if needed. But what is interesting to me is a lot of these buyback operations, and it's getting technical now for perhaps more macro participants is a lot of these buybacks are focused in a single PUSP in the 10 to 20 year sector or the 20 to 30 year sector. So you've got more of that same instrument being offered into this operation, it could be ultimately that the Treasury Department has to reach more to buy more of these. And while they have an impact on the day of the operation, it may again not necessarily be lasting in nature itself. Okay, so I'm going to do one more call for questions and I'm going to have one for you, Jay, in the interim. So if you have any more questions, put them in, we can answer them. Jay, we do have a lot of corporate clients, they care about rates a lot. So let's think of the role of CFO Treasurer, you know, finance office. What do you think this might mean for them? Listen, I think whether it's for them, we're for an investor side client, it just brings more variability into the stock process of our Treasury debt management than we've previously expected in the past. It does change how I think they're thinking about their liability structure. I'm not sure it does. Because to me, again, like I think I look at the moves and rates that we've had in the last month, they've been large and perhaps been more than you would have anticipated given the change in fit monetary policy expectations, but it's playing catch up after having lagged for a period of time. So you know, I think they need to be prepared for potentially more variability in moves and rates than anything else. Okay, that's helpful. Thank you. Another client question, do you think that if the buybacks were larger in size, could that cause inflationary pressure remain elevated and cause the Fed to raise quicker than expected? So is there an area to the Fed use there? See, I mean, this is not changing the monetary base. It's not changing the level of debt outstanding. It's transforming the composition of the debt outstanding. So I don't think it should have an impact on inflation. Okay, at all. And therefore, as a read through, I don't think it should have an impact on the Fed. Like the secondary read there to file on that question, we've got a number of questions recently, like the Fed just stopped its reserve management purchases of tea bills. Could this be a reason why the Fed would resume them if the Treasury Department will be selling more bills? I think they're completely separate decisions. The Fed has stopped applying tea bills because it's very evident that funding conditions and reserves are handful if not abundant. And I don't think an additional 14 to 16 billion in tea bills supply every quarter on the stock of debt of six to half trillion in tea bills would be enough to move the needle right there. Then let me just ask a follow a question. We watched the CNBC interview this morning. It's not about overreacting to any one thing that was said. The Treasury Secretary did refer to the fact that the Fed and the Treasury would work together if there was any change of the balance sheet. Can you elaborate on that? One of my favorite topics, like I think, you know, you talked about this a lot, Sam. I think there is an implicit Fed Treasury report out there already. And we know that the Fed chairman wants to get the balance sheet smaller. These test forces are in progress right now with the expectation that they will deliver something by the end of the year. I think there's a pathway to a smaller fed balance sheet. Should be done in a way where it doesn't impact a bank could be so it requires to put the regulatory reform. I think we argue that a smaller fed balance sheet means higher rates and steeper occurs overall. So how would the Treasury Department counteract that? Probably through more short end issuance and not providing more duration supply in the markets. But I think there's a magic trick here. And the magic trick to me is outside of the size of the Fed's balance sheet. It's the composition of its ownership. And you know, I've talked about this and we did it on a previous webinar with Mike. The average maturity of what the Fed owns in its Treasury portfolio is more than two and a half years longer than the average maturity in the Treasury market itself. And pre GFC what the Fed owned was actually shorter than the Treasury market itself. So there is close to two trillion securities from the Fed's portfolio maturing in the next few years. Right now it rolls them over passively at auction across the curve pro rata to whatever the Treasury is auctioning as a passive participant at auction. If it decides to roll them over short end instead it gets the balance sheet back to what it looked like pre crisis. It also gets the Treasury Department more short end issuance but not to the public in a way that does not impact rain months. So I think that's the coordination that's very, very powerful right? Fascinating. Okay, we have seen more questions. Do you see a crowding out effect for bank deposits with increased bill issuance and material increase? Well, I mean, I already think like there's been competition for bank deposits to begin with. And the reason we've seen money markets on day UM grow so considerably is that you know bank deposit betas relative to what money market funds or other equivalent vehicles can I think can pay means that there's greater demand for money market funds versus banks overall. Again, I do not think an incremental 16 billion per quarter or 64 billion per annum will materially change that again because the T bill market is 22% of the debt outstanding and over 6.5 trillion in size. And then last question from clients right now, if the curve remains steep or keep steepening before the next buyback, is there anything else the Treasury could do? I think again, you know, if you have to sort of all rabid out of the hat, you could take more aggressive action on auction sizes. They've already seemingly tried to not lay the groundwork for that but leave themselves some optionality. But to me, that's almost in case of emergency break the glass sort of event. And again, you could bank on that having an impact for a short period of time and just wouldn't expect it to be durable. Okay. Jay, we covered a lot of ground before we close out and thank everyone, anything else you'd want to add on this topic, maybe something we didn't cover from your report. You know, I think the only other thing to say is, you know, I've gotten a buy line from a number of investors over the last days, like maybe this is being done because markets are illiquid and it's the summer. And that's true. And perhaps that, you know, has reduced sort of duration demand overall. But we've been making the case here, Sam, for like the last six months that Treasury market liquidity's been on a steadily improving trend for the last number of years and in 2026. And when I look in particular, liquidity, the long end of the curve, we talked about dispersion, we talked about liquidity preference high level measures of liquidity are very close to decade highs. So yes, it's a less liquid point on the curve than the others, but it's been in the context of what has been a steadily improvement in liquidity over the past few years. Okay. So I don't see any other client questions. I want to thank everyone for tuning in, for your time. I want to thank Jay for his time and expertise. And as always, if any way we can help you feel free to reach out to your sales representative or to us in research, that concludes today's webinar. Thanks for joining. Thanks, everybody. This communication was provided for informational purposes only. Please read the JP Morgan Research Reports related to its content for more information, including important disclosures. Copyright 2026, JP Morgan Chase and Co. All rights reserved. This episode was recorded on Thursday, August 20th, 2026.