1 week ago
Bessent Bond Buyback Plan Sparks Short Squeeze in US Markets
The US Treasury plans to buy back more long-term government bonds.
Investors think this could help push borrowing costs lower.
Because of that, some traders are buying more options that would benefit if bond prices rise.
This has been called a “Bessent put,” meaning traders expect the Treasury to support the market if needed.
Treasury bonds have recently performed better than similar interest-rate swaps.
However, long-term US interest rates are still high.
Some experts say the plan may help for a while but cannot solve the country’s large budget deficits.
The Treasury might use money held at the Federal Reserve to fund more purchases.
Traders are watching to see whether the buybacks expand again.
Treasury bonds have outperformed equivalent-maturity swaps since Scott Bessent announced expanded buybacks.
The 30-year Treasury swap spread narrowed to its smallest level since February, while the 10-year spread fell to about 39 basis points.
Options positioning turned more bullish for long-maturity Treasury futures, with calls outweighing puts at several heavily traded strikes.
The Treasury General Account could reportedly help finance purchases of longer-dated bonds, further supporting the market.
Analysts said buybacks may lower yields temporarily, but large US budget deficits and Treasury supply remain longer-term upward pressures.
- Who
- US Treasury Secretary Scott Bessent, the Treasury Department, bond investors and derivatives traders.
- What
- The Treasury’s plan to at least double buybacks of longer-dated bonds has affected Treasury, swap and options markets.
- Where
- US Treasury and derivatives markets.
- When
- The market moves followed Bessent’s announcement the previous week; JPMorgan’s cited positioning survey was conducted on Aug. 24.
- Why
- The plan aims to reduce US borrowing costs, particularly the 10-year yield, and has led investors to expect possible further Treasury support.
Buyback Supporters
Buyback Skeptics
Effect on borrowing costs
Buyback Supporters
Analysts said expanded buybacks could provide a light backstop for long-term bonds, lower yields and make it harder for traders to bet against the market.
Buyback Skeptics
Other analysts said buybacks may technically reduce yields but do not change the structural forces pushing borrowing costs higher.
Market interpretation
Buyback Supporters
The narrowing swap spreads and more bullish long-end options positioning suggest investors believe the Treasury could increase purchases again if needed.
Buyback Skeptics
Long-term yields remain near multiyear highs, indicating that the announcement has not eliminated market concerns.
Underlying fiscal pressure
Buyback Supporters
A large government buyer could provide relief to a market dealing with substantial bond supply.
Buyback Skeptics
Higher structural US budget deficits still require significant Treasury issuance, which could continue to pressure yields upward.
Key facts
- 30-year swap spread
- Narrowed to its smallest level since February after the buyback announcement.
- 10-year swap spread
- Compressed by three basis points to around 39 basis points.
- 30-year Treasury yield
- Near 5.2%, close to its highest level since 2007.
- 10-year Treasury yield
- Near 4.7%, still close to its highest level since early 2025.
- Hedge fund swap-spread positions
- Estimated by Federal Reserve researchers at a record $305 billion last year, up from less than $50 billion in 2022.
- JPMorgan survey
- Neutral positions fell to 54% from 67%, while long and short positions increased.
- Options positioning
- Calls were more than twice as large as puts at the four most populated strikes for some listed SOFR option tenors.
Quotes
Jason Williams
Head of US rates strategy at Citi
“This new Treasury ‘put’ improves the asymmetry of owning the long end by providing a potential light backstop”
livemint.com
Alex Manzara
Derivatives broker at R.J. O’Brien & Associates
“The current ‘play’ is in long end, and current fear, if you can call it that, is that long rates might plunge due to intervention.”
livemint.com
Libby Cantrill
Head of public policy at Pimco
“While conducting buybacks at the long-end of the yield curve may technically decrease yields, a fundamental reason why Treasury yields are higher – notably higher structural US budget deficits, which requires a significant supply of Treasuries to finance the US debt – is not changing anytime soon”
livemint.com
Sources
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