This move aims to eliminate market doubts about the source of repurchase funding, providing ample ammunition to lower long-term Treasury yields.

Written by: Zhang Yaqi, Wall Street Journal

The U.S. Treasury is considering using nearly one trillion dollars from the Treasury General Account (TGA) to support the expansion of its Treasury repurchase program. If this statement is implemented, it will significantly change the market's perception of the Treasury's ability to intervene in long-term interest rates.

According to CNBC, citing two senior Treasury officials, the TGA has been viewed as an available source of funds. Last week, the Treasury announced it would double the repurchase scale of off-the-run securities from $2 billion per operation to at least $4 billion, surprising the market. Besant stated in an interview that the actual operational scale could even exceed this new lower limit.

However, last week's unexpected announcement did not clarify the source of funds, leading to a brief rebound in the bond market followed by a rapid decline, with yields rising again and market doubts about the Treasury's actual intervention capabilities noticeably increasing. After news of the potential involvement of the TGA surfaced, the yield on the 10-year U.S. Treasury bond fell nearly 4 basis points to 4.70%, resulting in a flattening of the curve.

Meanwhile, gold and Bitcoin strengthened simultaneously. Bloomberg macro strategist Simon White pointed out that if the TGA is used to provide funding for the repurchases, this operation is no longer strictly a "twist operation," but closer to a net liquidity injection, which exerts upward pressure on inflation, suggesting that long-term yields should be slightly higher than current levels from a fundamental perspective. This also somewhat explains why gold and Bitcoin have become more direct "quasi-QE trade" targets than U.S. Treasuries.

The Nature and Scale of the TGA

The TGA is essentially a "checking account" held by the U.S. government at the Federal Reserve, funded by existing tax revenue and acts as a liquidity reserve mechanism. Besant has currently accumulated the TGA balance to about $950 billion, far exceeding the target levels of $550 billion to $600 billion during the Biden administration.

Previously, the market generally assumed that the Treasury would finance the repurchases by issuing more short-term Treasuries. Besant referred to this operation in an interview with CNBC as "Treasury Twist," meaning buying long-term Treasuries while simultaneously issuing short-term Treasuries. If the TGA intervenes, it implies that there is no need for an equal scale of short-term Treasury issuance, thus relieving the supply pressure on the short end, logically benefiting a decline in short-term yields - but on Monday, short-term yields actually rose, moving contrary to expectations and leaving some market participants confused.

The management of the TGA balance has a large discretion. During former Treasury Secretary Janet Yellen's tenure, the official goal was to maintain a balance level "sufficient to meet cash needs for the upcoming week." The current Treasury Department has stated that account management follows principles "consistent with long-term cash balance policies." Officials pointed out that if a portion of TGA funds is used while still wishing to maintain the current balance level of nearly one trillion dollars, the Treasury will then need to replenish this through additional Treasury issuance.

The Space and Potential Risks of Using the TGA

Officials believe that reducing the TGA balance to a certain extent does not pose an immediate risk. Regarding the debt ceiling, the latest estimates indicate that the new round of debt ceiling crises may not occur until next winter or early next spring, allowing the Treasury ample time to rebuild the account balance. Officials noted that if a portion of the TGA is utilized while still aiming to maintain the current balance level of nearly one trillion dollars, the Treasury will then need to replenish this through additional Treasury issuance.

Bloomberg macro strategist Simon White highlighted potential reverse risks from a technical perspective: using the TGA to purchase long-term Treasuries is not a reserve-neutral operation—the reserves exchanged for TGA cannot be reused until the government meets its repayment obligations, which is fundamentally different from simple short-term Treasury issuance, overall posing slight upward pressure on inflation, meaning long-term yields should be slightly higher from a fundamental standpoint than Monday's closing level.

Additionally, officials stated that the use of the TGA helps to dispel another layer of market concern, namely that the Treasury might seek assistance from the Federal Reserve to intervene in the Treasury market. Although the Federal Reserve holds the TGA account, it does not consider it a monetary policy tool.

Treasury Responds to Concerns about "Rules and Predictability"

The announcement to expand the repurchase program was issued two weeks after the quarterly refinancing statement, which deviates from market norms and has raised doubts among some institutions about whether the Treasury has strayed from the traditional principles of "rules and predictability" in Treasury issuance, with some even suggesting that this move has the intent of "manipulating the market."

In response, senior officials refuted this, emphasizing that the announcement did not change the official auction schedule and that there are nearly three weeks remaining until the first operational execution date (September 9), allowing the market ample preparation time. The Treasury also disclosed the entire quarterly operational plan in an announcement on August 19.

Besant stated in an interview with CNBC that the Treasury's intention is to make the market "focus on fundamentals, rather than chasing headline news in a thin liquidity environment during the off-peak season," adding, "We are working hard to maintain market balance." He also noted that with the court ruling refund replaced by new tariff revenues, the fiscal deficit will improve, and senior officials will hold a meeting soon to formulate specific plans for improving the fiscal situation.