US Treasury Push to Lower Long-Term Yields Sparks Wall Street Fears of Market Manipulation

The traditional formula for US interest-rate policy is coming under strain. The Federal Reserve sets the target range for policy rates, while the market determines long-term yields. But as pressure from the White House, reduced communication and controversy over the Fed’s inflation response have narrowed the central bank’s room to maneuver, the Treasury Department has moved to steer long-term yields lower by adjusting Treasury maturities and supply. The shift has fueled market concerns about what some see as a Treasury version of quantitative easing.

CNBC reported on Aug. 24 that the Treasury is considering using about $940 billion in its Treasury General Account, or TGA, for long-dated Treasury buybacks. A larger buyback would reduce the amount of long-term debt circulating in the market and could lower yields by pushing prices higher.

After long-term Treasury yields rose to their highest level in 19 years on Aug. 20, the Treasury said it would raise the size of its buybacks from $2 billion to at least $4 billion. That announcement, followed by Treasury Secretary Scott Bessent’s remarks threatening investors betting on Treasury sales and then the report that the department was weighing use of TGA funds, led to a string of assessments that the Treasury had stepped in as a rate fixer in place of the Fed.

Concern about the policy’s impact is greater than optimism. US long-term yields have risen as swelling national debt and fiscal deficits lifted the risk premium. Many in the market view the Treasury as leaning on short-term steps that do little more than pressure investors. Citigroup said on Aug. 24 that even if the government buys back debt, it would still need to issue Treasuries to reduce the deficit.

Some analysts say repeated unusual measures could erode policy credibility and predictability. Market participants could demand a higher premium to buy long-dated Treasuries if they have to account for unexpected changes in issuance. Stanley Druckenmiller, chairman of Duquesne Family Office, said artificially suppressing interest rates raises risks. A government trying to defend prices against fundamentals always loses, he said.

The mismatch with the Fed is another source of unease. Calls inside the central bank for higher benchmark rates to curb inflation are growing louder, making it unusual for the Treasury to be pushing down long-term yields at the same time. Attention is focused on the Fed’s annual Jackson Hole symposium in Wyoming, set for Aug. 27-29.

Hwang Jung-su, New York correspondent, Hankyung.com hjs@hankyung.com