Treasury bond buyback programme gathers pace

NEW YORK: The long-simmering idea that the United States government should stand ready to buy back treasury securities from investors to improve market functioning is moving closer to reality.

While the Treasury Department has carried out buybacks in the past, most recently between 2000 and 2002, and while its industry advisers since then have urged it to consider establishing a programme, steps taken in that direction last week were more than experts anticipated.

Liquidity metrics for the US government debt market are approaching crisis levels after a year of steep losses for bonds caused by rising inflation and Federal Reserve (Fed) interest rate increases, and with the central bank simultaneously cutting some of its holdings, the situation may worsen.

Last week, Treasury Secretary Janet Yellen expressed concern about it.

“When we warned last week that treasury buybacks might begin to enter the debt management conversation, we didn’t expect them to jump so abruptly into the limelight,” Wrightson ICAP economist Lou Crandall wrote in a note to clients.

“September’s liquidity strains may have sharpened the treasury’s interest in buybacks, but this is not just a knee-jerk response.”

The specific step taken by the treasury was in its quarterly survey of primary dealers, released last Friday in connection with the financing plan to be announced Nov 2.

The 25 dealers were asked for a detailed assessment of the merits and limitations of a buyback programme for government securities.

When the last financing plan was released in August, the department’s industry advisers on the Treasury Borrowing Advisory committee recommended further analysis of the issue.

Taken together with Yellen’s recent comments and extreme volatility in the United Kingdom bond market in recent weeks, the query suggests “that the November refunding will likely show more progress towards opening a buyback facility,” JPMorgan Chase and Co rates strategists said in an Oct 14 research note.

The buybacks were conducted from 2000 to 2002 to allow the treasury to continue selling new bonds in order to maintain market access at a time when the federal government was running a budget surplus and didn’t require the funds.

Funds raised by selling new bonds were used to repurchase old ones.

Under current circumstances, which include large federal deficits, a buyback programme would have different purposes.

They include adding liquidity to parts of the market most in need of it and allowing treasury bills to be sold in more consistent quantities, with proceeds used for buybacks of securities less in demand.

The segment of the market seen to have the most to gain from a buyback programme rallied last Friday after the survey was released.

Reintroduced in May 2020 in quantities that swamped demand, 20-year bonds outperformed neighbouring sectors.

Crandall said that’s misguided and that debt managers with “a limited amount of cash to devote to improving the performance of the overall market” are “not going to pour a disproportionate amount of cash into salvaging the 20-year sector.”

Treasury liquidity metrics last month reached the worst levels since the market mayhem at the onset of the pandemic.

The Bloomberg US Government Securities Liquidity Index, a measure of deviations in yields from a fair value model, has remained near the highest levels since March 2020, when a flight to cash prompted the Fed to begin buying securities to stabilise the market.

“You can drive a truck through the bid-ask spread” for some securities, said Deborah Cunningham, chief investment officer of global liquidity markets and senior portfolio manager at Federated Hermes, in a Bloomberg Televisa interview. — Bloomberg