Massive Buyback Faces "Cold Reception"! U.S. Treasury Bond Purchase Plan Hits a Wall, Liquidity Tool Risks Becoming Ineffective

Zhihu Finance APP notes that as policymakers debate the Federal Reserve's interest rate policy, persistent inflation, and the ever-expanding government financing needs, the US Treasury's expanded debt buyback plan may be encountering a bottleneck.

In a report on September 11, Subadra Rajappa, Head of US Rates Strategy at Société Générale, pointed out that in the first operation raising the buyback cap to $600 million, the Treasury accepted only $520 million in securities. Investors submitted bids totaling $1.05 billion, resulting in a cover ratio of about 2.

Rajappa noted that this is the weakest bid-to-cover ratio since the program began, far below the typical range of 9 to 10 seen for most of 2025.

The Treasury previously raised the operation cap on the grounds of continued strong market participation and a substantial amount of long-term bond offers received. Initial results suggest that participation is not growing rapidly enough to support a threefold increase in the buyback cap.

The Treasury bought back a broader range of bonds

The composition of this operation may provide more insight than the relatively low cover ratio.

Out of 40 eligible securities, the Treasury accepted offers for 23 of them, compared to about 3 in a typical operation. This buyback also included 9 securities that had never before been purchased through the program.

Previous operations focused heavily on a small group of older 20-year Treasury bonds. This broad coverage may represent a deliberate strategic shift; it may also mean the Treasury has to cast a wider net to come closer to its expanded objective.

The next buyback involving 20-year to 30-year securities is scheduled for September 24. Rajappa stated that this operation will help determine whether the latest result was a one-off adjustment or indicates that larger buybacks require the Treasury to buy from a structurally broader group of securities.

Implications for Investors

For bond investors, this result casts doubt on whether the Treasury can use buybacks as a powerful and easily scalable tool to support long-term debt market liquidity. If participation remains limited, the Treasury may have to accept less favorable prices, scale back operations, or adjust the size and maturity of its bond issuance.

These choices could affect long-term Treasury yields, the shape of the yield curve, and the borrowing costs throughout the economy. Mortgage rates, corporate financing costs, and equity valuations are all highly sensitive to changes in long-term government bond yields.

Buybacks do not necessarily reduce federal debt. The Treasury typically finances these purchases through the issuance of other securities. The primary goal of the program is to improve market liquidity and manage the composition of outstanding debt.

Mounting Pressure on 20-Year Bonds

Rajappa believes that when the government announces the November refinancing plan, 20-year Treasuries are the most likely to face reduced issuance.

Since the Treasury reintroduced this maturity in 2020, it has struggled to build a reliable investor base. Former Treasury Secretary Steven Mnuchin also suggested in 2024 that, given the relatively high financing costs, the government should consider discontinuing the 20-year Treasury.

Société Générale believes that the Treasury’s buyback activity is in fact highlighting the persistent weakness of the 20-year segment. Buying back older bonds can gradually reduce the outstanding balance and allow the market to prepare for smaller auctions going forward.

Rajappa stated that if the Treasury wants to exert a greater impact on long-term yields, adjusting the issuance structure may ultimately prove more effective than ever-expanding buyback operations. Therefore, the November refinancing announcement could become an important litmus test to determine whether officials are ready to cut back on 20-year debt issuance.