JPMorgan Chase & Co. (JPM) strategists are sounding the alarm that the US Treasury’s aggressive bond buyback program may ultimately backfire, pushing yields higher rather than lower.
The Treasury announced it would at least double the size of its bond buybacks, framing the move as providing “greater liquidity support” to financial markets amid mounting concern over long-term borrowing costs.
The announcement sent long-term US yields lower initially, coming just one day after the benchmark US long bond yield surged to its highest level since 2007.
The Treasury responded to that surge by doubling long-end buybacks to at least $4 billion per operation, a move that drew significant attention from Wall Street analysts and investors alike.
JPMorgan strategists, however, cautioned that the intervention fails to address the underlying problem driving yields higher in the first place.
The US currently runs a 6% deficit in an economy operating near full employment, a structural imbalance that buybacks alone cannot resolve, according to JPMorgan’s analysis.
“Absent real fiscal consolidation, we fear the markets will view this action as lacking credibility,” strategists including Jay Barry wrote in a note released alongside the warning.
“This could contribute to higher term premium and yields over time should Treasury become more opportunistic in its approach to debt management and move further away from its ‘regular and predictable’ tenet,” Barry and colleagues added.
The buyback amount is widely considered negligible when measured against a Treasury market worth $32.2 trillion, underscoring the limitations of the approach.
US national debt has now topped $40 trillion, raising the stakes considerably as Washington continues issuing new securities at a rapid pace to fund ongoing deficits.
Treasury yields serve as a global benchmark for borrowing costs, meaning sustained increases ripple outward into US mortgages, corporate debt, foreign currencies, and sovereign bonds worldwide.
The yield on 30-year US Treasuries, the primary focus of the accelerated buyback program, was up 3 basis points at 5.2256%, while 10-year yields moved 1 basis point higher to 4.6723%.
Not everyone on Wall Street shares JPMorgan’s skeptical view, with Citigroup taking the opposite stance and recommending investors buy 20-year US Treasuries directly.
Citigroup argued the Treasury’s move signals a clear intention to restrain long-term yields and pointed to the potential for a strong rebound in the US bond market ahead.
Analysts broadly noted that the intervention reveals the administration’s sensitivity to rising long-term rates and its willingness to step into markets when borrowing costs climb sharply.
