Shall We Repeal the Laws of Economics – Part III

Treasury buybacks may briefly suppress long-term Treasury yields, but they cannot solve the inflation, fiscal and capital-supply forces pushing rates higher.

• The 30-year U.S. Treasury yield closed above 5.3% on August 17, its highest level in 19 years, prompting Treasury to raise the maximum size of long-dated buybacks from $2 billion to at least $4 billion per operation on August 19, before increasing it to $6 billion.
• The policy response does not address the underlying drivers of yields: PCE inflation was 3.7% in July against the Federal Reserve’s 2% target, the fiscal deficit was about 6% of GDP despite 4% unemployment, and net interest outlays were projected to exceed $1 trillion.
• Financing buybacks with additional Treasury-bill issuance would not reduce total indebtedness and could shorten the maturity of government debt, exposing it to more frequent refinancing at prevailing rates.
• The Treasury must issue roughly $2 trillion of new net debt while also refinancing maturing securities, and AI investment is expected to require more than $5 trillion in global data-center spending through 2030 according to McKinsey & Company.
• Market reaction suggests limited confidence in the intervention: Evercore ISI reported that yields moved higher during the first enlarged buyback operation, while the author argues that long-term yields largely reflect fundamentals rather than poor liquidity alone.

Takeaway: Investors should not treat Treasury buybacks as a durable solution for high long-term rates; the more consequential risks are persistent inflation, fiscal indiscipline, heavy debt issuance and eventual dollar debasement, although the dollar’s reserve status still allows the U.S. to service its debt nominally.