Treasury Secretary Scott Bessent’s move to expand government debt buybacks, intended to stabilize markets, is instead triggering fresh concerns about inflation among investors.
Over the past several days, investors have begun pricing in higher inflation expectations, a reaction that suggests the Treasury Department’s intervention may carry unintended consequences.
The so-called breakeven rate, a market-based measure comparing Treasury yields to inflation-protected securities of the same maturity, rose across the curve to its highest level in more than two months.
At the 10-year horizon, the breakeven rate climbed to 2.34% on Thursday, its highest since June 10, while five-year breakevens hit their highest level since June 16.
The concern follows a Treasury announcement Wednesday that it will be at least doubling the size of its typical $2 billion debt buyback, a routine operation begun in 2024 that helps provide a market for longer-dated debt.
Though Bessent insisted the move was not an attempt to tamp down yields, it came after 10- and 30-year Treasurys hit levels not seen since prior to the global financial crisis in 2008.
“The background here is very unforgiving at the moment, There’s this cocktail of concerns that has risen up,” said Van Hesser, chief strategist at KBRA, a credit and bond rating agency.
Hesser added that rising inflation pricing “fits into the backdrop where people are concerned about inflation, and that continues to lean on the market,” describing how these risks flare up periodically and manifest in markets.
While long-dated Treasury yields plunged the day of the buyback announcement, they rebounded Thursday and continued higher Friday, with the 10-year benchmark standing at 4.73% in early afternoon trading, up 3.4 basis points and above its pre-announcement level.
The 30-year yield climbed 3.6 basis points to 5.27%, as Treasury is required to offset buybacks of long-dated debt by issuing shorter-term bills.
Thierry Wizman, Macquarie Group’s global foreign exchange and rates strategist, wrote that the dollar’s weakness may also be “the result of ‘read-through’ of the Treasury announcement to the prospect of looser Fed policies.”
Wizman added that “upon the announcement of the buyback increase and the ‘signaling effect’ it mustered, the 10-year breakeven rose by about 6-7 bps – not insignificant,” describing the development as suggesting “something about the announcement was ‘inflationary.'”
The market response raises the stakes for Fed Chairman Kevin Warsh, who is scheduled to deliver his closely watched keynote on Aug. 28 at the central bank’s annual symposium in Jackson Hole, Wyo.
Wizman warned that “were Warsh to signal that he would stay ‘dovish’ indefinitely, it could be self-defeating for him and the Treasury, since inflation breakevens would rise further, perhaps undoing the stability in the nominal long-term yields that Scott Bessent is trying to achieve.”
Not everyone views the recent yield moves as alarming, with David Zervos, chief market strategist at Jefferies, pointing out that the 10-year note is in “one of the tightest ranges” it has seen in 20 years.
“It’s not running away from anybody,” Zervos said, adding that “what we’re seeing is a different kind of Treasury secretary, someone who’s willing to come in and be more tactical, and that is something new for the market.”
Hesser echoed that view, arguing that current yield levels are more in keeping with historical norms following a prolonged period in which the Fed kept rates artificially low.
“A 4 to 5% 10-year is a very constructive level of rates in a thriving economy,” Hesser said, describing it as “a very healthy rate that allows interest rates to do what interest rates are supposed to do, and that is moderate capital flows through the economy.”
