US Treasury: Why It Can't Lower Its Rates

An Intervention by the Treasury That Falls Short

The U.S. Treasury announced on Wednesday that it would double the maximum size of certain long-term bond buybacks, increasing from $2 billion to $4 billion per operation starting September 9. The announcement came as the 30-year Treasury yield hovers around its highest levels since 2007.

The 10-year yield then dropped from 4.68% to 4.63% within minutes. However, exactly 24 hours later, that same yield had already surpassed its pre-announcement level, reaching 4.71%.

In light of this failure, Treasury Secretary Scott Bessent immediately raised the stakes. He stated that buybacks could significantly exceed $4 billion per operation, which was not enough to convince the market.

Why U.S. Long-Term Rates Are Soaring

To understand this standoff, one must distinguish between short-term rates, largely driven by the Federal Reserve, and long-term rates, primarily set by the market. The latter depends on several components: inflation expectations, future rate expectations, debt supply, and term premium.

Several of these factors are currently working against Washington. The U.S. federal debt has just surpassed $40 trillion, forcing the Treasury to increase issuances to finance deficits. At the same time, tensions with Iran and rising oil prices are rekindling fears of a return to inflation.

The 30-year yield has thus risen to around 5.3%, a level not seen since 2007. The more debt there is to absorb, the higher the compensation buyers demand to lock up their money for three decades.

A "Mini-QE" That Isn't Really One

The operation resembles a QE (Quantitative Easing), a policy through which the Fed creates money to massively buy bonds and lower interest rates. But unlike the central bank, the Treasury must finance its buybacks by issuing debt elsewhere. It mainly alters the composition of the debt in circulation.

The problem remains the term premium: to lend to the U.S. for 30 years, investors demand compensation for inflation, debt, and rate risks. If their distrust increases, the 30-year yield may stay above 5%, even if the Fed lowers its rates.

The Consequences for Bitcoin and Cryptos

The announcement immediately benefited alternative assets: gold, silver, and platinum gained over 3%, while the dollar (DXY) fell by about 1%.

Bitcoin is trading around $75,551, up 8.5% over 24 hours and 19% over a week. The movement also triggered $1.71 billion in short position liquidations.

If Washington intervenes further to contain long-term rates, fears of dollar devaluation could enhance the appeal of scarce assets like gold and Bitcoin.

Four Scenarios for the Future

Washington essentially has four options: increase buybacks, issue more short-term debt, accept high long-term rates, or rely on Fed intervention through a new QE.

The latter hypothesis would be the most significant for the markets: it could fuel fears of inflation and monetization of deficits, potentially favorable to Bitcoin.

For now, the events of August 19 and 20 mainly show one thing: a few billion in buybacks are not enough to tame a $32 trillion bond market.