The US Treasury managed to push long-term borrowing costs lower last week. The relief lasted barely a day.
That rapid reversal has sharpened questions over whether Washington can contain rising bond yields through market interventions while leaving the much larger problem of US government debt unresolved.
Dr Komal Sri-Kumar, president and founder of macroeconomic consultancy Sri-Kumar Global Strategies and a former chief global strategist at Trust Company of the West, argues that it cannot. Sri-Kumar, who advises multinational investors and sovereign wealth funds on global risk, says the Treasury’s expanded bond buybacks address the symptoms of the sell-off rather than its underlying causes.
His warning comes after US Treasury Secretary Scott Bessent announced on Wednesday that the government would at least double the maximum size of buybacks of 10-to-30-year Treasury securities, from $2 billion to $4 billion per operation, beginning on September 9.
The announcement followed a sharp sell-off that had pushed the 30-year Treasury yield to about 5.34 per cent, its highest level since 2007. The Treasury said the expanded purchases were intended to provide liquidity support in longer-dated securities.
Markets initially responded. Long-term yields dropped sharply following the announcement, with investors buying Treasuries as the government signalled its willingness to support the market.
But the respite proved short-lived.
Yields subsequently reversed much of the decline. The 10-year yield returned to around 4.7 per cent and the 30-year moved back above 5.2 per cent, leaving borrowing costs not far from where they had been before Bessent stepped in.
Sri-Kumar described the intervention as a “one-day wonder”.
“Bond investors considered Treasury’s proposed intervention and have rejected the idea that it offered a durable solution,” he wrote in his SriKonomics newsletter.
His argument is essentially one of scale.
US federal debt has crossed $40 trillion, while annual deficits remain around $2 trillion. Against that backdrop, the additional long-dated purchases announced by Treasury are small
US federal debt has crossed $40 trillion, while annual deficits remain around $2 trillion. Against that backdrop, the additional long-dated purchases announced by Treasury are small. Reuters estimates the changes will add at least $14 billion to buybacks during the current quarter, while the Treasury market itself runs into tens of trillions of dollars.
“The expanded buybacks that Bessent announced are minuscule by comparison,” Sri-Kumar wrote.
He argues that investors are demanding higher yields because they know Washington will need to continue issuing enormous quantities of debt to finance persistent deficits. Buying back several billion dollars of long-term securities does little, in his view, to alter that equation.
Dr Komal Sri-Kumar, President of Sri-Kumar Global Strategies
Sri-Kumar He argues that investors are demanding higher yields because they know Washington will need to continue issuing enormous quantities of debt to finance persistent deficits. Buying back several billion dollars of long-term securities does little, in his view, to alter that equation
That is also why the reversal in yields matters.
Had the recent rise simply reflected temporary illiquidity during thin August trading, additional Treasury purchases might reasonably have been expected to provide more lasting relief. Sri-Kumar instead sees the rebound as evidence that investors are demanding greater compensation for holding long-term US government debt.
Bessent has defended the move as a liquidity operation and has indicated Treasury could go further. “We have a big toolkit so we’ll see,” he told CNBC, adding that current yields did not reflect underlying economic fundamentals.
Sri-Kumar sees a danger in that approach.
Treasury is effectively buying some longer-term securities while continuing to finance government borrowing heavily through shorter-term bills. There is nothing inherently unusual about managing the maturity structure of government debt, but Sri-Kumar questions the timing of an unexpected increase in long-bond purchases immediately after yields reached multi-year highs.
“There is nothing unusual about the Treasury managing the maturity profile of government debt,” he wrote. “What is unusual is using an unexpected, mid-quarter expansion of long-bond purchases immediately after a surge in yields.”
That distinction is important because bond yields are supposed to reflect the price investors demand to lend money to the US government.
If investors begin to believe Treasury will repeatedly intervene whenever long-term yields rise beyond politically uncomfortable levels, Sri-Kumar argues it could ultimately make the problem worse by increasing uncertainty over inflation and the extent of future intervention.
There is another complication.
The Treasury’s attempt to ease pressure on longer-term borrowing costs comes as the Federal Reserve is trying to convince markets that inflation remains under control. If fiscal authorities are simultaneously attempting to increase liquidity in parts of the bond market, the two arms of US economic policy risk sending different signals.
Sri-Kumar says that puts additional pressure on Federal Reserve chairman Kevin Warsh.
“How can Warsh persuade investors that the central bank intends to contain inflation if the Treasury is simultaneously injecting additional liquidity into the long end of the bond market in an attempt to suppress borrowing costs?” he wrote.
The argument overlaps with, but differs sharply from, the interpretation offered by CrossBorder Capital founder Michael Howell.
Howell also considers the additional Treasury purchases far too small to control a multi-trillion-dollar bond market. But he believes investors should pay attention to the signal behind Washington’s actions rather than the dollar amount involved.
Howell argues the Treasury’s increasing reliance on shorter-term issuance, combined with an ample-reserves banking system, could allow government borrowing to be accommodated through expanding commercial bank balance sheets. In his view, that amounts to a form of monetary financing that could temporarily support financial-market liquidity.
Sri-Kumar sees the other side of the same trade.
More intervention may temporarily suppress yields, but it does not eliminate the debt that investors ultimately have to finance. And if markets conclude Washington is increasingly unwilling to tolerate higher long-term rates, repeated intervention could increase the inflation premium investors demand for holding those bonds.
The difference between the two views is important for investors.
Howell’s framework suggests policymakers may still have enough liquidity firepower to extend the current rally in financial assets, even if the longer-term global liquidity cycle is becoming less supportive.
Sri-Kumar’s argument is that liquidity cannot permanently overcome fiscal arithmetic.
There are other forces pushing yields higher. Massive spending on artificial intelligence infrastructure is creating additional demand for capital, while inflation pressures and geopolitical uncertainty have complicated the outlook. Technology companies financing data centres, electricity infrastructure and computing capacity are competing for capital alongside the US government.
Sri-Kumar acknowledges that AI investment may eventually increase productivity and become disinflationary, as Bessent has argued. But he says its immediate impact is considerably different.
“The immediate effect of AI investment is an extraordinary demand for capital, electricity, data centers and increasingly scarce equipment,” he wrote.
That competition for capital matters well beyond the Treasury market.
US government bond yields form the benchmark against which vast amounts of global finance are priced. Persistently higher Treasury yields can feed into mortgage rates, corporate borrowing costs and asset valuations, while making relatively safe government bonds more attractive against equities.
It also means the struggle over long-term yields is becoming increasingly important to the durability of the current market rally.
For now, Treasury has demonstrated that it can move the world’s largest bond market.
What it has not demonstrated is that it can keep it there.
Sri-Kumar summed up his argument in considerably fewer words.
“The Treasury can buy bonds for a day,” he wrote. “It cannot buy the bond market’s confidence.”
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