More on Treasury buyback operations

 

hat tip Kevin Coldiron - the ideas lab for graphic 

The Treasury buyback program has received considerable attention, but some key foundational information is missing. The current buyback program has been in place since 2024 and can be broken into two parts: the cash management portion is conducted when seasonal tax receipts come due or when the TGA has excess cash to time debt retirement with cash available, and liquidity support buybacks that are tied to specific bonds to ensure that the Treasuries outstanding have added liquidity. We will see both cash management operations and liquidity support increasing, so there will be a larger active player in the bond market.

The amount of debt does not change. Additional bill issuance is used to retire old, less-liquid coupon debt in equivalent size. Yes, there may be more T-bills outstanding to stabilize trading in less-liquid coupons. It can be viewed as refinancing/composition operations. In some sense, buybacks are like the Operation Twist (2011-12) from the Fed because the supply of bills will increase while supply out the curve will decline.

The Fed has stopped its balance sheet runoff but still buys bills to provide ample reserves. The Treasury will issue more bills, so the Fed will buy some of those bills, which will ensure reserves do not change. In the short run, the Treasury may issue more bills, but it can also issue more on-the-run Treasuries to fund buybacks when it makes regular issuances.

Whether you like it or not, the Fed and Treasury will coordinate more. To some degree, these two will coordinate their actions.