The impact of repurchasing U.S. Treasury bonds lasts only 24 hours? Bessenet: We have many tools, let's wait and see

Author: Li Dan, Long Yue

On Thursday, August 20, Eastern Time, U.S. Treasury Secretary Mnuchin released a series of policy signals, covering recent market hotspots from the U.S. bond market to the Iran issue. Just the day before, the Treasury had announced it would double the scale of long-term Treasury bond repurchases, but the market rebound lasted less than 24 hours. In the face of rising yields, Mnuchin made it clear that the Treasury's intervention tools are far from exhausted and previewed a new fiscal restructuring initiative aimed at addressing high borrowing costs for long-term loans.

Mnuchin stated that the Treasury's single long bond repurchase could exceed $4 billion and emphasized, "We have a large toolbox, so stay tuned." He also revealed that President Trump has tasked him and the Director of the Office of Management and Budget with leading a new fiscal restructuring plan, which is expected to be announced this weekend or early next week.

Mnuchin also stated that current U.S. Treasury yields do not fully reflect the fundamentals of the U.S. economy, particularly noting that the liquidity of 30-year Treasury bonds is "very scarce"; regarding the dollar, he reiterated that the strong dollar policy will continue. In terms of corporate financing, he believes that expectations for AI investment are making companies "almost insensitive" to yields when issuing corporate bonds, and corporate investment is expected to ultimately drive productivity growth.

On the Iran issue, according to CCTV, Mnuchin revealed that a press conference will be held on August 24, next Monday, to specifically elaborate on the U.S. action plan regarding Iran. Mnuchin hinted that increasing economic pressure could become an important means to avoid a large-scale military action restart. CCTV mentioned that he said, "We have asymmetric information, and I’m not sure why the oil issue has become a focal point; if we apply maximum economic pressure, it means that a large-scale military conflict is unlikely."

According to Xinhua News Agency, Mnuchin stated that the Trump administration will intensify economic pressure on Iran and threatened to implement "unprecedented economic isolation" measures against Iran. Mnuchin also "called out" to all U.S. allies, saying, "We want to overthrow this regime," and warned that they must either stand with the U.S. or be against it.

Mnuchin also stated, he reiterated the strong dollar policy, saying the dollar is returning to levels from two months ago, and he does not understand the rise in oil prices on Thursday.

Is the repurchase benefit only lasting a day? Mnuchin says "24 hours is just noise"

On Wednesday, August 19, the U.S. Treasury announced that it would at least double the scale of liquidity support repurchase operations for 10-20 year and 20-30 year Treasury bonds, raising the single operation cap from $2 billion to at least $4 billion. The Treasury positioned this move as a measure to improve liquidity in the long-term Treasury bond market.

After this announcement, U.S. Treasury yields fell significantly for a time, and the global bond market received a brief boost. However, this benefit did not last long. On Thursday, U.S. long-term Treasury yields rose again, with the 30-year Treasury yield increasing by about 7 basis points to 5.26%, returning to levels prior to the Treasury's announcement of the expanded repurchase scale; the 10-year Treasury yield also reached 4.71%.

Reuters reported that the relief brought by the Treasury's repurchase measures may only be temporary, as the market remains focused on the U.S. massive fiscal deficit, inflation expectations, and long-term bond supply pressures. TD Securities strategist Howard Du previously stated that the market is not fully convinced that Mnuchin can effectively suppress long-end yields. Franklin Templeton's head of fixed income, Andrew Canobi, pointed out that multiple forces are currently pushing yields up and steepening the yield curve, including fiscal pressures from major developed economies and stubborn inflation.

Regarding this market volatility, Mnuchin responded calmly in an interview with CNBC: "Anything that happens within 24 hours is just noise." The Treasury's goal is to restore balance to the weak market and refocus investors on fundamentals rather than chasing news headlines in a thin market.

No upper limit on the repurchase "toolbox," single operation may far exceed $4 billion

When asked whether the Treasury would further intervene in the U.S. bond market, Mnuchin sent a rather clear signal.

He stated that the current Treasury bond market is a thinly traded sector, and the Treasury has a robust toolbox in the bond market. "We have a large toolbox, so stay tuned. Part of the work is to send signals—indicating that we believe yields do not reflect the underlying fundamentals."

Mnuchin particularly emphasized, the market may not have fully considered the fundamental factors of the U.S. economy. He believes that current U.S. Treasury yields do not reflect the fundamentals, and the liquidity of 30-year Treasury bonds is especially scarce.

As for how much the repurchase scale could expand, Mnuchin did not set a clear upper limit, only stating it would depend on conditions.

This means that after the Treasury has announced the expansion of the repurchase scale, Mnuchin has not signaled "this is it," but rather clearly reserved the possibility for further action. Market reports indicate that Mnuchin even stated that a single repurchase scale could exceed the previously announced $4 billion.

Mnuchin also stated that the U.S. can relieve its debt burden through its own development. In other words, while the Treasury alleviates long-term financing pressures through market operations, he still places the ultimate solution to the U.S. debt problem on economic growth and productivity improvement.

Fiscal restructuring plan to be announced soon, Mnuchin: to announce this weekend or early next week

Beyond market operations, Mnuchin also revealed a more structurally significant policy direction: the Trump administration is about to launch a new round of fiscal restructuring plans.

"We may announce measures to strengthen fiscal restructuring this weekend or early next week," Mnuchin stated in an interview with CNBC. He also revealed to reporters that President Trump has personally tasked him and Office of Management and Budget Director Russ Vought to jointly lead this plan.

Mnuchin did not specify what this new fiscal plan would involve. However, he hinted that it might include saving "hundreds of billions of dollars" through a fraud task force and cutting federal project funding allocated to states that has been "squandered."

It is noteworthy that just on Wednesday, U.S. Treasury data showed that the total public debt of the United States has surpassed $40 trillion for the first time.

There is a significant divergence in the market regarding the actual effects of this fiscal restructuring plan. Evercore ISI chief strategist Sarah Bianchi wrote in a report on Thursday, "We are skeptical about the government's ability to take substantive action on the deficit issue. The impact of this week's surprise repurchase announcement was fleeting, and we believe any announcements related to the deficit will have similarly limited effects."

However, Mnuchin remains optimistic about the fiscal outlook. He stated that the U.S. fiscal deficit "is very likely" to have peaked. He attributed this to the rebound in tariff revenues—after the Supreme Court overturned most of Trump's tariff measures from last year, the government is rebuilding the import tax revenue system, and related tariff revenues are recovering.

"Putting all this together, the next few weeks and months will be very exciting because we are advancing this plan," Mnuchin said regarding the new fiscal plan.

Short-term debt financing repurchases long-term debt, can the fiscal version of QT be effective?

Another concern in the market regarding the Treasury's repurchase operations is where the money is coming from.

The Treasury's statement on Wednesday did not specify the specific funding sources for this expanded repurchase operation. When responding to fluctuations in financing demand, the Treasury typically relies on issuing short-term Treasury bills with maturities of less than one year for adjustments.

If the Treasury is indeed providing funding for repurchasing long-term Treasury bonds by increasing the issuance of short-term Treasury bills, then this operation could create effects similar to a fiscal version of "quantitative tightening" (QT)—by increasing short-term debt and reducing long-term debt supply, changing the maturity structure of the Treasury bond market.

The Financial Times previously cited market analysts discussing this possibility; Bloomberg also quoted Deutsche Bank strategists' reports describing this change as "QT is here."

However, this does not mean that the Treasury is implementing traditional quantitative easing.

Unlike the Federal Reserve, which can directly create bank reserves, the Treasury cannot create Treasury bills out of thin air and directly use them as payment for purchasing long-term Treasury bonds. If funding for repurchases is provided through the issuance of short-term debt, it ultimately still requires investors to purchase these short-term Treasury bills.

Therefore, some market participants believe that this operation may have a relatively limited actual incremental demand for long-term assets. Bloomberg's commentary even pointed out that even if the repurchase scale further expands, the new demand remains very limited compared to the vast stock and issuance scale of U.S. long-term debt, making it difficult to change the supply-demand dynamics of long-end U.S. Treasury bonds on its own.

This is also one of the important reasons why long-term yields rose sharply again on Thursday: while the Treasury can influence the liquidity structure of the market, it is challenging to eliminate fiscal deficits, debt supply, and inflation risks solely through repurchases.

AI investment makes companies less sensitive to financing costs, Mnuchin optimistic about productivity growth

In addition to government debt, Mnuchin also discussed the rapidly expanding corporate bond issuance in recent years and the impact of AI investment on the bond market.

He stated that because companies believe they can achieve high returns from AI investments in the future, he has observed that corporate bond issuance is "almost insensitive" to yields.

Mnuchin noted that issuing long-term bonds is interesting for companies; if he were a corporate executive, he would pay more attention to the middle of the yield curve, known as the "belly."

In his view, corporate investment will ultimately promote productivity growth, so many companies' current financing activities will not significantly change due to short-term fluctuations in yields.

This judgment also corresponds to another pressure facing the current bond market: AI infrastructure development requires substantial capital expenditures, and technology companies and related industry chain companies are continuously financing through the bond market, increasing the supply in the credit bond market.

However, Mnuchin is more focused on the long-term economic returns that AI investment may bring. In his logic, if AI investments can truly translate into productivity improvements and economic growth, then the relatively high financing costs currently borne by companies may ultimately be offset by higher investment returns.

Mnuchin reiterates strong dollar policy, says the dollar is returning to levels from two months ago

Regarding the dollar, Mnuchin's signals are relatively clear.

He stated that the dollar has been very stable. The dollar is returning to levels from two months ago. When asked about the dollar weakening after the Treasury's announcement to expand repurchases on Wednesday, Mnuchin reiterated, "We will continue to maintain a strong dollar policy."

This statement came after the Treasury expanded the long bond repurchase scale. The market had previously been concerned that the Treasury's direct intervention in the long-term U.S. Treasury bond market might reinforce investors' worries about U.S. policy intervention and the risks of dollar assets. Bloomberg reported that some investors even believed the dollar could become a potential "victim" of this bond market intervention.

However, Mnuchin clearly wants to convey the opposite message to the market: the Treasury's market operations do not mean that the U.S. is abandoning its strong dollar policy.

The Trump administration shifts to economic pressure, press conference on Iran issue to be held next Monday

When discussing the Iran issue, Mnuchin released another important policy signal.

According to Xinhua News Agency, Mnuchin threatened on Wednesday to impose economic isolation on Iran, stating in an interview with NBC that "this will be the largest and most coordinated economic isolation in history."

He stated that a press conference will be held next Monday to discuss U.S. actions regarding Iran and that the U.S. will impose "the most severe" sanctions on Iran.

The U.S. government is currently trying to force Iran to make concessions by further strengthening economic, financial, and trade pressures. The day before Mnuchin's remarks, Xinhua mentioned that President Trump posted on social media on the 19th, stating that Iran missed the opportunity to reach an agreement with the U.S. and announced the implementation of "the most devastating economic action ever against a nation" on Iran.

Mnuchin's latest remarks are particularly noteworthy as Xinhua mentioned that Mnuchin stated that the Trump administration's plan to severely damage Iran's economy may allow the U.S. to avoid launching large-scale military actions against Iran. He said:

"If we apply maximum economic pressure, it means that a large-scale military conflict is unlikely to break out."

In other words, the Trump administration's current tools for pressuring Iran may be further shifting from military means to economic and financial sanctions.

Xinhua cited U.S. media analysis pointing out that waging an "economic war" against Iran is not without difficulties. Iran has long been under U.S. sanctions and has developed a certain level of adaptability to related pressures, while the Iran issue is closely related to global energy supply and the safety of shipping in the Strait of Hormuz, so the U.S. escalation of economic sanctions may also produce complex spillover effects.

Mnuchin announced that he would further clarify the details of the actions next Monday, which also means that the market may soon receive more information regarding the scope, targets, and implementation methods of the sanctions.

The sudden rise in oil prices leaves Mnuchin "confused," says U.S. actions will push oil prices down

It is noteworthy that as the U.S. prepares to further impose economic pressure on Iran, Mnuchin himself expressed surprise at the rise in oil prices on Thursday.

"We saw a significant rise in oil prices today, and I really don't understand it," Mnuchin stated.

He also said that the upcoming U.S. economic actions will lead to a "faster decline" in oil prices.

Oil prices have become an important variable that current U.S. policymakers must face. Rising crude oil prices not only increase energy costs for U.S. consumers and businesses but may also re-raise inflation expectations, further pushing up long-term U.S. Treasury yields.

This directly relates to Mnuchin's current efforts to stabilize the long-term U.S. Treasury bond market: if the situation in Iran leads to sustained energy supply risks, rising oil prices and inflation expectations may offset some of the effects of the Treasury's repurchase operations on long-end yields.

Therefore, Mnuchin emphasizes that the Treasury has sufficient "toolbox" for the U.S. Treasury bond market while also trying to reduce Iran-related energy risks through economic means, which actually reflects a common policy logic—minimizing external shocks to the long-term financing costs faced by the U.S.

Currently, the market has provided initial feedback with the 30-year Treasury yield rising back to 5.26% on Thursday: the Treasury's market operations can quickly change short-term trading sentiment, but to truly reverse the trend of long-term yields ultimately depends on broader fundamental factors such as fiscal deficits, inflation, economic growth, energy prices, and the supply-demand dynamics of U.S. debt.