Longer-term U.S. Treasury yields dropped sharply Wednesday after the Treasury Department announced it would increase the size of its government debt repurchases by “at least double” in a surprise move.
The Treasury also announced that outstanding public debt had reached $40 trillion for the first time.
The yield on the 30-year Treasury bond plunged from 5.26% to as low as 5.18%. The 10-year yield, which has a heavy hand in steering consumer borrowing rates, was less affected by the announcement but still dropped from 4.68% to as low as 4.63%.
U.S. stocks also traded higher initially but faded as the day went on. The S&P 500 closed higher by 0.2%, and the Nasdaq Composite ended up just 0.16%.
The Treasury Department’s announcement effectively means the agency will be stepping in as a larger buyer of longer-term bonds, which have been selling off.
Wednesday’s announcement abruptly altered the “tentative buyback schedule” Treasury released just two weeks ago, an unusual shift. The change will take effect Sept. 9, the agency said.
The 30-year Treasury yield hit its highest level since 2007 last Thursday, serving only to compound the already soaring interest costs the federal government pays on the massive national debt.
On Wednesday, the Treasury Department auctioned 20-year debt at the second-highest yield since the bond was introduced in 2020.
When bonds fall, their yields rise, and consumer interest rates follow.
The announcement appears to be the latest effort by Secretary Scott Bessent to keep a lid on rates, which have been soaring this year.
Earlier this summer, the Treasury Department, along with Japan’s Finance Ministry, intervened to bolster the sliding Japanese yen. Instead of using U.S. dollars to buy more yen, however, the Treasury sold euros and used the money to buy the yen.
The move — which reportedly caught the European Central Bank by surprise — may have been intended to dissuade Japan from selling some of the trillions of dollars in U.S. Treasury bonds it holds, which would have further driven up yields.
The broader move higher in rates this summer accelerated after Fed Chairman Kevin Warsh’s most recent news conference on July 29.
The Fed has “a credibility problem,” KPMG chief economist Diane Swonk wrote in an Aug. 11 note.
Warsh offered little guidance, causing the bond market to begin second-guessing the Fed’s inflation-fighting resolve despite continued geopolitical tensions, trade wars and a surge in energy prices stemming from the war with Iran and the Russian invasion of Ukraine.
Asked Wednesday afternoon whether Americans should be concerned about what’s happening in the bond market, President Donald Trump said, “No, I don’t think so.”
“Our country is doing so well despite interest rates,” he said, before he reiterated his long-standing demand that the Federal Reserve lower benchmark borrowing costs.
Since the war with Iran began at the end of February, surging energy prices have driven bond yields higher, especially longer-dated yields, as investors bet on higher inflation for longer.
Crude oil prices are 50% higher than they were at the start of the year, while the cost of gas domestically has risen 37% since the war started. As of Wednesday, the national average price for a gallon of unleaded gas was $4.08.
Following Wednesday’s Treasury announcement, some investors and market watchers were skeptical that the move would have any lasting impact.
“The market reaction suggests that this is an important tactical move from the Treasury,” said Jim Bullard, former president of the Federal Reserve Bank of St. Louis. He said on Bloomberg TV that it was “a little bit unexpected.”
“I don’t think it changes the fundamentals of big fiscal deficits and a Fed on the sidelines,” Bullard added, “which is what’s driving longer-term yields higher.”
Economist Mohamed El-Erian, a professor at the Wharton School at the University of Pennsylvania, said that the Treasury’s announcement could help bring down mortgage rates in the “short term” but that it also “risks collateral damage and unintended consequences.”
On Wednesday, the average 30-year fixed mortgage rate was 6.72%, according to Mortgage News Daily, down slightly from Tuesday’s 6.75%.
“The effects of this financial engineering are short dated unless followed by fundamental policy adjustments,” El-Erian wrote on X.
Swonk told NBC News on Wednesday, “We’re still issuing an enormous amount of debt.” She noted that the size of the federal government’s debt “has eclipsed the size of the U.S. economy for the first time since World War II, and interest expense is soaring.”
So far this fiscal year, that interest expense is nearly $1.2 trillion.
The Federal Reserve has kept rates unchanged this year, unlike central banks in Europe and Japan, which have raised rates to try to slow inflation.
“This is NOT a debt paydown,” Peter Boockvar of One Point BFG Wealth wrote of Wednesday’s buyback announcement. “It is just a rearrangement of the maturity schedule of Treasuries.”
Last year, during a similar Treasury bond sell-off, Bessent told Bloomberg News that he had “a big toolkit that we can roll out” if needed, which included increased government debt repurchases.
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