Treasury buybacks improve liquidity but don't reverse long-term yield rises

The St. Louis Federal Reserve reported that U.S. Treasury buybacks, which involve repurchasing older, less-liquid securities, are intended to improve market liquidity. These buybacks primarily target off-the-run bonds rather than the most recently issued debt.

Despite these efforts, the convenience yield, or premium investors place on holding U.S. government debt, has continued to decline, and long-term Treasury yields have risen sharply in recent months. For instance, the 10-year yield reached about 5.3%, and the 30-year yield rose above 5.6%, levels not seen since September 2002.

Several factors contribute to this selloff, including higher oil prices that have revived inflation concerns, resilient economic activity, and an increasing supply of Treasury issuances that investors must absorb. These pressures have pushed yields higher through multiple channels.

The Treasury expanded its buyback operations, especially for longer-dated securities, as a tool to support market functioning. However, analysis up to October 1 indicates that these buybacks have had limited success in slowing the rise in long-term yields.

The Treasury had planned to purchase $38 billion in off-the-run securities through October for cash management, but the buybacks mainly address illiquidity in specific securities rather than reversing the broader decline in the convenience premium attached to government debt.