Treasury's 'Twist' Fails to Tame Bond Yields as National Debt Tops $40 Trillion
Treasury Secretary Scott Bessent announced a plan to more than double the size of government debt repurchases, a move he called a "Treasury twist" aimed at lowering long-term borrowing costs. The announcement initially sent yields lower, but the effect was short-lived, with bond markets quickly resuming their upward trajectory.
The Plan and Initial Market Reaction
On Wednesday, the Treasury Department said it would increase buyback operations to at least $4 billion, targeting the 10-to-20-year and 20-to-30-year segments of the market, which had seen little buying since late June. According to a Treasury statement cited by International Business Times, the increase "reflects Treasury's desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants."
Following the announcement, the benchmark 10-year note fell 6 basis points and the 30-year bond dropped 9 basis points, as reported by CNBC. However, the reprieve was temporary. By Thursday, the 30-year yield rose to 5.27% before settling at 5.24%, erasing more than half of the drop, according to The Philadelphia Inquirer. The 10-year yield closed the week at 4.73%, near its highest level since Bessent took office, Moneycontrol reported.
Why the Bond Market Remains Skittish
The market's reaction reflects deep concerns about the U.S. fiscal trajectory. The national debt surpassed $40 trillion this week, with about $32 trillion held by investors and the public. The Treasury's interest bill is running well in excess of $1 trillion a year, and interest expenses consume about 19% of federal revenue, according to the Peter G. Peterson Foundation.
The Congressional Budget Office (CBO) projects a deficit exceeding $2 trillion this year, more than 6% of GDP, a level historically seen only during wartime or financial crisis. The Trump administration's tax-cut measure, the One Big Beautiful Bill, is estimated to add $4.7 trillion to the debt over the next decade, according to the CBO. Bessent has blamed the Biden administration for budget woes but acknowledged that Trump's tariffs and tax policies contributed, telling Newsmax that a provision allowing immediate deduction of factory expenses is adding to this year's deficit.
Beyond U.S. fiscal issues, global factors are pushing yields higher. Inflation has jumped since President Donald Trump initiated a war with Iran, which has also reignited fears of oil supply interruptions. Brent crude topped $92 per barrel on Friday, up from around $72 during the pause. Additionally, a surge in corporate issuance, particularly from tech giants like Alphabet and Microsoft for AI infrastructure, is adding to supply pressures. The sell-off came amid surging public debt in the U.S., Europe, Japan, and Canada, as well as uncertainty about Federal Reserve intentions.
Fed Uncertainty and Internal Tensions
Confusion over Fed Chairman Kevin Warsh's strategy is adding to investor concerns. Warsh has come close to endorsing the rise in yields, saying on July 29 that "markets have done quite a bit." He has also failed to articulate a rationale for keeping rates unchanged and has suggested the inflation target could be altered in January, raising questions about the Fed's policy direction. Warsh is scheduled to speak at the Jackson Hole symposium on Friday.
Warsh wants to revamp the Fed's balance sheet, which holds $4.54 trillion of Treasuries, and has spoken of a new "Fed-Treasury accord." Mark Dowding of RBC BlueBay Asset Management said Bessent's actions put Warsh in a difficult position. George Goncalves of MUFG commented on Warsh's need to "flip the script."
Analysts Skeptical of the Plan's Impact
Many market observers doubt the buyback plan will provide lasting relief. Lawrence Gillum of LPL Financial called the announcement "more about a strategic symboling than an actual fix," as quoted by The Philadelphia Inquirer. Sarah Bianchi of Evercore ISI wrote that the administration cannot realistically do anything material on the deficit at this point, according to Moneycontrol.
Rebecca Patterson said "Buybacks are more signal than substance," and that the more effective approach would be Fed quantitative easing, Moneycontrol reported. Bessent had previously referred to sustained QE as a "perpetual dosing regimen," suggesting a reluctance to embrace that tool. Priya Misra of JPMorgan Asset Management said "It makes sense that rates have been moving higher," reflecting the view that the market is reacting to fundamental factors.
Bessent, meanwhile, has said investors are acting on "bad information" and that he has "asymmetric" access to the real picture. He and White House budget chief Russ Vought will examine both revenue and cost sides, and he has suggested a crackdown on fraud and reductions in transfers to states. The Elon Musk-led Department of Government Efficiency attempted similar spending cuts last year but fell short of its own estimates.
The administration is also pressing Congress to increase borrowing for the Pentagon, which could further expand the deficit. With the debt ceiling waiting to be raised—Congress raised the legal limit to $41 trillion—the fiscal challenges are likely to persist, keeping upward pressure on yields.