Treasury Secretary Bessent announced a Treasury buyback program, an increase in an existing program, amid much market discussion about its objectives and what it means. Investors should note that this does not change the size of the deficit or the Treasuries outstanding. It may change the debt’s composition and will affect the spread between on-the-run and off-the-run bonds. For the Treasury market to function well, off-the-run bonds need strong liquidity, and this should be the main focus of this program.
We are concerned with the plumbing of the Treasury market. Primary dealer capital is constrained under current bank regulation, so dealer capital is out of balance relative to trading and outstanding debt. Dealers must maintain high leverage, and if capital is insufficient, their ability to maintain orderly markets is compromised.
The unstated and overlooked issue is the potential problems in the plumbing of the Treasury market. Actions are being taken to constrain the potential for a liquidity crisis. The chief bond salesman - the Treasury secretary - is not going to talk about this issue.
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