Treasury Considering Bonds Buybacks

The Fed is selling and the Treasury might be buying their own debt, that’s the new financial system of all tricks and very few treats.

The Federal Reserve Banks have been divesting $95 billion worth of bonds every month since June by not re-investing the proceeds of maturities.

That has led to a liquidity crunch in bond markets, with the Treasury holding a survey last month asking banks – which act as primary dealers in buying bonds directly from the Treasury – whether the US government should consider bond buybacks.

The findings are expected later this month with the Treasury stating on Wednesday that it has not yet made any decisions on whether to implement buybacks as the matter is still under study.

Any buyback program would work by the Treasury buying old bonds, which tend to be less liquid, to then turn around and issue new bonds to cover the ‘buying.’

So not quite a stocks buyback, or an ethereum style burning of supply, more an Operation Twist to increase interest rates or a “purely a tactical liquidity-driven operation” as Kathy Bostjancic, chief US economist at Nationwide, put it.

The end result presumably would be the government paying more in interest for their debt as these older bonds are less liquid because they’re on older interest rates which are much lower.

The only unknown seemingly being whether the new debt would be short-term, higher interest, or long term – lower interest but still very high compared to even just last year.

The sole purpose of this tactical operation also seems to be just to allow Fed to continue tightening if they want as Fed won’t have to worry about the liquidity crunch getting out of hand.

This is ostensibly to combat inflation, which has been on a downtrend for the past three months, but how exactly the government will cover these higher interest rates is not too clear considering their mountain of debt.

Nor is it too clear why, what are mostly banks, should be bailed out by the government buying their bonds to sell it to them straight away.

“Buybacks would allow banks to get [bonds] off their balance sheet when there are no buyers and would allow them to use their balance sheet more efficiently,” said Gennadiy Goldberg, a rates strategist at TD Securities.

That’s at a cost to the taxpayer, the same taxpayer that is not seeing higher rates in savings from the same banks that are making $100 billion a quarter in interest spreads.

But the current chair of the Treasury, Janet Yellen, received millions of dollars in speaking fees from these banks, so giving them free money is being considered.