Author: Gelonghui
According to a report published today by CNBC 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 financial support for expanding bond buybacks.
The TGA is essentially a government cash account held by the U.S. Treasury at the Federal Reserve.
Government tax collections and the issuance of Treasury bonds can add money to this account; fiscal expenditures and debt repayments are drawn from it.
Its size may reach approximately $1.05 trillion by the end of October.
In other words, the Treasury indeed has a large cash buffer, allowing it to complete some repurchase operations in the short term without relying heavily on newly issued short-term debt.
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 it would increase the scale of long-term Treasury bond buyback operations from a maximum of $2 billion to at least $4 billion per operation, 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 directly issue a large amount of short-term bonds to raise funds, the newly created liquidity would still need to be absorbed by the market, potentially leading to an increase in short-end financing supply.
By using the TGA first, it cantemporarily bypass this step.
When the Treasury spends the money from the TGA, the funds ultimately enter the private sector financial system; under other unchanged conditions, the 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; large withdrawals by the Treasury may temporarily increase system liquidity, while replenishing the TGA may absorb liquidity in turn.
Therefore, if the Treasury does increasingly rely on the TGA to complete buybacks, then there is likely to be this feedback in the short term:
Treasury reduces cash balance → Market liquidity increases → Purchases of long-term Treasury bonds 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 hard to maintain in the long run.
The Treasury has already clearly indicated that it needs to maintain a cash balance of around $950 billion by the end of September, so in the medium to long term, if the TGA declines significantly, it will still need to replenish the account via taxes, bond issuance, and fiscal cash flows.
In other words, it simply shifts the pressure of issuing short-term debt today to the future.
Furthermore, the long-term U.S. Treasury bond yields are not solely determined by supply and demand.
While Treasury buybacks can indeed improve liquidity and marginally reduce the supply of long-term bonds, thus lowering term premiums, if investors are genuinely worried about the U.S. fiscal deficit continuing to expand over the next few years, merely buying back a few billion or hundreds of billions of Treasury bonds is unlikely to change the long-term equilibrium.
What the market truly wants is a whole new fiscal plan, a larger move.
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