Treasury weighs cash account for expanded bond buybacks

The US Treasury is exploring the possibility of using its $950 billion cash balance to fund the purchase of longer-term government bonds, potentially giving Treasury Secretary Scott Bessent more flexibility in response to market pressures. The Treasury General Account (TGA) is being considered as a source of funds for these off-the-run securities purchases, although the exact amount that could be utilized and the timing of any decision remain unclear.

The TGA is the primary operating cash account for the federal government at the Federal Reserve. The Treasury recently doubled the size of liquidity-support buybacks for bonds with maturities between 10 and 20 years, and 20 and 30 years, from $2 billion to at least $4 billion each between September 9 and November 4. Bessent has suggested that individual purchases could eventually exceed $4 billion, potentially allowing for a more decisive move if long-term borrowing costs remain high.

The TGA's involvement in these buybacks would differ from the typical approach of financing them through additional Treasury issuance. This approach could have immediate effects on bond yields, as seen on Monday when the benchmark 10-year yield declined slightly and the 30-year yield also fell. The TGA has been running near the $1 trillion mark, with an average balance of about $954 billion in the week ending August 19 and a balance of around $936 billion on August 19 itself.

While the TGA is a substantial cash reserve, it should not be considered an unrestricted $1 trillion fund for market intervention, as the government still needs to meet its day-to-day obligations and protect against potential disruptions in debt issuance. Using part of the TGA for buybacks could impact financial conditions differently compared to a program funded by selling fresh Treasury bills, as it would transfer government cash into the banking system and increase commercial bank reserves at the Federal Reserve.

The ultimate impact would depend on factors such as the size and duration of the drawdown, the maturity profile of subsequent issuance, and the pace at which the TGA is restored. The controversy surrounding this potential move comes as Washington aims to address renewed stress in the long end of the government bond market, with 30-year Treasury yields reaching above 5.3% this month, their highest level since 2007.

The Treasury market has grown significantly alongside federal borrowing, with marketable Treasury debt totaling tens of trillions of dollars. The buyback program is primarily aimed at improving liquidity in older, less actively traded bonds rather than permanently reducing government debt. This approach has led to skepticism about whether buybacks alone can substantially lower long-term yields.

Initial buyback announcements have resulted in a rally in bonds, but much of the yield decline has been reversed as investors refocused on fiscal outlook, inflation, and new debt supply. Currently, Treasury expects to borrow $739 billion in privately held net marketable debt during the July-September quarter, based on a $950 billion end-quarter cash assumption.

They also project $628 billion in borrowing during the October-December quarter while allowing the cash balance to drop to $850 billion. Markets are closely monitoring whether the Treasury will increasingly prioritize short-term bills while supporting longer-dated bonds through repurchases, which would alter the maturity composition of federal debt and reduce some long-duration supply while relying more on short-term financing.