Massive buybacks meet a "cold reception"! US Treasury bond purchase plan hits a wall, the liquidity tool may turn into a "dud."

Notice that just as policymakers debate the Fed's interest rate policy, persistent inflation, and the government's growing financing needs, the U.S. Treasury's expanded debt buyback program may be hitting a bottleneck. Subadra Rajappa, head of U.S. rates strategy at Societe Generale, noted in a Sept. 11 report that in the first operation to raise the buyback cap to $6 billion, the Treasury accepted only $5.2 billion of securities. Investors submitted $10.5 billion in bids, for a cover ratio of about 2x. Rajappa said this was the weakest bid-to-cover ratio recorded since the program began, far below the 9x to 10x levels common for much of 2025. The Treasury had previously raised the operation size cap on the grounds of persistently strong market participation and the sizable volume of long-dated bond offers it received. The initial results show that participation has not grown fast enough to support a threefold increase in the buyback cap. The Treasury bought back a broader range of bonds The composition of the operation may be more telling than its relatively low bid-to-cover ratio. Of 40 eligible securities, the Treasury accepted offers on 23 of them, whereas a typical prior operation involved only about 3. The buyback also included 9 securities that had never before been purchased through the program. Previous operations were highly concentrated in a small batch of older 20-year Treasuries. Such broad coverage may represent a deliberate strategic shift; it could also mean the Treasury had to cast a wider net to get close to its expanded target. The next buyback involving 20-year to 30-year securities is scheduled for Sept. 24. Rajappa said that operation will help determine whether the latest results are an isolated adjustment or indicate that larger buybacks require the Treasury to buy from a structurally broader pool of securities. What it means for investors For bond investors, the result casts doubt on whether the Treasury can use buybacks as a powerful and easily scalable tool to support liquidity in the long-term debt market. If participation remains limited, the Treasury may have to accept less favorable prices, scale back operations, or adjust the size and maturity of the bonds it issues. Those choices could affect long-term Treasury yields, the shape of the yield curve, and borrowing costs across 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 by issuing other securities. The program's main purpose is to improve market liquidity and manage the composition of outstanding debt. Pressure builds on 20-year bonds Rajappa believes the 20-year Treasury is the most likely candidate for reduced issuance when the government announces its November refunding plan. Since the Treasury reintroduced the maturity in 2020, it has struggled to build a reliable investor base. Former Treasury Secretary Steven Mnuchin also suggested in 2024 that the government should consider eliminating the 20-year Treasury given its relatively high financing cost. Societe Generale believes the Treasury's buyback activity is in effect illuminating persistent weakness in the 20-year sector. Buying back older bonds can gradually reduce the outstanding balance while preparing the market for smaller future auctions. Rajappa said that if the Treasury wants to exert greater influence on long-term yields, adjusting its issuance structure may ultimately prove more effective than an ever-expanding buyback operation. As such, the November refunding announcement could be an important test of whether officials are ready to cut the supply of 20-year debt.