Scott Bessent just cried uncle on the bond market: Chart of the Day

US Treasury Secretary Scott Bessent has decided to increase the support for the bond market by stepping up purchases of long-term government bonds. This move came unexpectedly, as the Treasury had previously left its long-term buyback cap at $2 billion. However, the cap has now been increased to at least $4 billion starting from September 9.

The bond market responded immediately, with the 30-year Treasury yield falling to its biggest one-day drop in 10 months, only to rebound sharply the following day. The dollar index also fell by 0.75% on Wednesday, its biggest drop since April 30. Treasury's willingness to take more bonds than investors were offering was unprecedented, as the offer pile of bonds was not suddenly getting bigger.

Regular buybacks were launched by the Treasury in 2024 and have been gradually expanded, with increased frequency of long-term operations last year. This program is not new, but Treasury's willingness to take more bonds is. The program aims to make the bond market easier to navigate by buying older bonds that are harder to trade, freeing dealers to keep more bonds moving through the market.

However, this move does not remove the underlying reasons for the higher long-term yields, such as inflation, heavy government and corporate borrowing, or doubts about the Federal Reserve's policy direction.