What will save the US debt? Bessent is eyeing the trillion-dollar fund pool

Author: Gelonghui

According to a report by CNBC today titled "Bessent could tap near $1 trillion Treasury General Account to fund bond buybacks, sources said," the Treasury Department may utilize the Treasury General Account (TGA) to provide funding support for expanding bond buybacks.

The TGA is essentially the government cash account held by the U.S. Treasury at the Federal Reserve.

Government tax revenues and bond issuances can flow into this account; government expenditures and debt repayments are also drawn from here.

Its scale may reach approximately $1.05 trillion by the end of October.

This means that the Treasury indeed has a significant cash buffer, allowing it to rely less on new short-term debt in the short term to complete some buyback operations.

Why do this?

On August 19, the yield on the 30-year U.S. Treasury bond reached 5.34%, the highest level since 2007.

Subsequently, the Treasury announced that it would increase the scale of long-term bond buyback operations from a maximum of $2 billion per operation to at least $4 billion, covering nominal bonds with maturities of 10-20 years and 20-30 years.

However, as of now, the yield on the 30-year U.S. Treasury bond still hovers near the highs not seen since 2007.

This indicates that the market today is not simply lacking liquidity.

If the Treasury were to issue a large amount of short-term bonds to raise funds, the new liquidity would still need to be absorbed by the market, potentially leading to an increase in short-term financing supply.

By using the TGA first, this step can be temporarily bypassed.

When the Treasury spends the money from the TGA, the funds ultimately enter the private sector financial system, and under unchanged conditions, bank reserves in the banking system may increase.

The New York Fed previously pointed out that changes in the TGA balance directly affect liquidity in the financial system; when the Treasury withdraws a large amount, it may temporarily increase system liquidity, while replenishing the TGA may conversely absorb liquidity.

Therefore, if the Treasury indeed relies more on the TGA to complete buybacks, the feedback in the short term is likely to be:

Treasury reduces cash balance → Market liquidity increases → Long-term Treasury purchases increase → Long-term yields are suppressed.

This is why the market interprets the use of the TGA as a more aggressive strategy than continuing to issue short-term debt for financing.

However, this strategy is difficult to sustain in the long run.

The Treasury has clearly projected that it needs to maintain a cash balance of about $950 billion by the end of September, so from a medium to long-term perspective, if the TGA declines significantly, it will still need to replenish the account through tax revenues, bond issuances, and fiscal cash flows.

In other words, it merely shifts the pressure of issuing short-term debt today into the future a bit.

Moreover, the yield on long-term U.S. Treasury bonds is not determined solely by supply and demand.

Treasury buybacks can indeed improve liquidity and marginally reduce the supply of long-term bonds, thereby lowering term premiums.

But if investors are genuinely concerned about the continuously expanding fiscal deficit in the U.S. over the next few years, then merely buying back tens of billions or hundreds of billions of dollars in bonds is unlikely to change the long-term equilibrium.

What the market truly wants is a brand new fiscal plan, a larger action.