Legend has it that Canute the Great once ordered the tide to recede. He wanted to prove to his courtiers that a king does not rule the ocean. However, the tide did not obey. This Thursday, September 10, the American Treasury replays a budgetary version of the scene. Up to $6 billion of long-term bonds are repurchased in a single transaction. The objective: to bring down rates that have been rising for months. The federal debt has already crossed $40 trillion. Washington therefore takes out the checkbook to reassure its creditors.
Bessent triples the bet on the repurchase of government bonds
Thursday's operation targets securities maturing in 10 to 20 years. This is one of the two segments targeted by the liquidity support program. It is led by Treasury Secretary Scott Bessent. However, barely three weeks earlier, Washington had already doubled the ceiling on these buybacks. It went from 2 to 4 billion per operation, until November 4. This time, the amount climbs again, to $6 billion, triple the level that prevailed this summer.
Buying up its own debt is nothing new for Washington. Indeed, the Treasury had already done so between 2000 and 2002, under the Clinton administration. He had then sold off nearly $67.5 billion in high-coupon bonds. But the federal budget then showed a surplus. Therefore, the operation repaid the debt in advance.
Nothing like that today. However, relaunched in May 2024, the program is running in the middle of an era of deficits numbering in the trillions. It is now removing old, low-coupon bonds, issued when rates were close to zero, from the market. These securities no longer find buyers at their face value.
The calculation is simple on paper. Concretely, by absorbing the least liquid bonds, those that the market calls âoff-the-runâ, the Treasury is aiming for a specific objective. Breathe fresh air into a bond market that is running out of steam.
Over the entire month of September, the total amount of repurchases would exceed $34 billion. A sum that seems enormous. However, the federal debt is already close to 40,000 billion dollars, and new annual issues are around 2,000 billion. Faced with these figures, this acquisition weighs barely more than a drop in the ocean.
10-year rates snub Treasury gesture
The market did not applaud. Indeed, the day after the announcement, the 10-year yield rose to 4.85%. This is its highest level since November 2023. Stocks have extended their losses. Bonds too.
The 10-year rate is not just of interest to financiers. It serves as a reference for real estate loans and corporate borrowing on the markets. The State itself is no exception, forced to borrow ever more to cover its deficit as this rate rises.
Not really the scenario hoped for by Scott Bessent. The episode is extremely reminiscent of that of August. The doubling to 4 billion had caused long-term rates to fall by a few basis points. But they quickly resumed their ascent.
At Natixis, analyst John Briggs summed up the logic at the time: âIf rates rise too much, the Treasury will seek to counter the movement, and we now know where certain pain points lie. » Peter Boockvar was already tempering enthusiasm: this repurchase does not reduce the debt in any way, it only rearranges its maturity schedule.
Besides, the deficit cannot be negotiated with a check for $6 billion. Nor the appetite of foreign buyers. Nor the term premium, this remuneration demanded by creditors to immobilize their capital over long maturities.
Bitcoin sniffs liquidity and rubs its hands
If you followed the August episode, what happens next will not surprise you. On August 19, the Treasury revealed the doubling to 4 billion. In 24 hours, $1.71 billion in short positions had been blown, including nearly 900 million on Bitcoin alone. The price jumped to $69,500, driven by a short squeeze. Result: this forced repurchase of short selling positions mechanically accelerates the rise.
There is nothing mysterious about mechanics. The more the State injects liquidity to maintain its bond market, the more traders see it as an accommodating signal. This signal favors assets with limited supply. Moreover, Bitcoin has always ticked this box, with a ceiling set once and for all at 21 million units.
This Thursday, the cryptocurrency is moving around $78,200, far from the euphoria of August. However, it remains on its guard in the face of each new episode of the bond saga. The reasoning is seductive. However, it is not guaranteed. A one-off short squeeze does not create an underlying trend. The correlation between Treasury redemptions and the price of Bitcoin remains a bet on sentiment, more than a mechanical equation.
