U.S. Secretary of the Treasury Scott Bessent.
According to two senior Treasury officials, the U.S. Treasury Department might leverage its nearly $1 trillion General Account (TGA) to fund its recently announced initiative to increase government bond purchases. This move could provide significant leverage in influencing long-term bond yields.
The Treasury recently surprised the market by doubling the size of its buyback operations for off-the-run, long-dated securities from $2 billion to at least $4 billion. Treasury Secretary Scott Bessent indicated on CNBC that these operations could even exceed the newly established minimum.
While the Treasury did not specify the funding source for these increased buybacks, many market participants assumed it would involve issuing short-term bills. Senior Treasury officials have not ruled out this possibility. Bessent referred to the operation as a "Treasury Twist," a term used for a government or Federal Reserve action where long-term Treasuries are bought using proceeds from short-term debt issuance, implying the sale of short-term bonds.
However, following the unexpected announcement, bonds have seen a decline from their initial rally, with yields rising. This is partly attributed to skepticism from many market analysts regarding the operation's potential effectiveness and concerns about the Treasury's limited resources.
Utilizing the TGA could potentially alter this market perception. The TGA functions as the government's primary operating account, essentially a reserve fund held at the Federal Reserve and funded through existing tax revenues. Secretary Bessent has reportedly grown the TGA to approximately $950 billion, significantly exceeding the previous Biden administration's target range of $550 billion to $600 billion.
The officials did not disclose the specific amount of the TGA that might be used or when such a decision could be announced. They clarified that the potential use of the TGA would likely be limited to the purchase of off-the-run securities, which were the focus of last week's announcement. Nevertheless, they confirmed that the TGA is considered an available resource.
No need for the Fed's assistance
The size of the TGA is discretionary. Under Janet Yellen's tenure, the Treasury aimed to maintain the TGA at a level sufficient for "a week ahead of cash needs." The current Treasury Department states it manages the account "consistent with Treasury's long-standing cash balance policy." If any portion of the TGA were used, and the Bessent Treasury aimed to maintain its near-$1 trillion balance, additional bonds would need to be sold to replenish the funds.
However, operating with a somewhat lower TGA balance would likely not pose immediate risks. A reduction in the TGA might mean less cash on hand for the government in the event of another debt-ceiling confrontation. Current projections indicate that a new debt limit may not be reached until next winter, or possibly early spring, allowing time to rebuild the TGA if necessary. In the interim, even a modest use of the TGA, or the mere acknowledgment of its potential use for bond purchases, could influence bond yields.
This approach would also alleviate concerns, voiced by some bond market participants, that the Federal Reserve might be called upon to assist the Treasury in such operations. (While the Fed holds the TGA, it does not consider it part of its monetary policy tools.)
The Treasury officials countered criticisms that the department had deviated from its long-standing practice of being "regular and predictable" in its bond sales and was attempting to manipulate the market with its surprise announcement. The announcement of increased buybacks occurred two weeks after the quarterly refunding announcement, when such information is typically communicated to the markets.
However, senior officials emphasized that no changes were made to the official auction schedules. They also noted that the announcement was made nearly three weeks before the first operation on September 9th, providing markets with adequate time to prepare. The Treasury also outlined its plans for the entire quarter in its August 19th announcement.
Furthermore, they pointed out that as the first auction is not scheduled until September 9th, it is too early to assess the market's reaction.
Secretary Bessent stated to CNBC last week that the Treasury's intention was to encourage the market to "focus on the fundamentals and not trade the headlines during… a quiet period in a thin market. So we are trying to keep the market in equilibrium."
He expressed optimism about an improvement in the deficit once tariff revenues are restored, following the replacement of court-mandated refunds with new tariffs. He also mentioned that senior officials would be meeting soon to develop plans aimed at improving the fiscal situation.
