TS Lombard, a macroeconomic forecasting and consulting firm, believes that while a large-scale increase in short-term debt issuance coupled with repurchases of long-term debt by the US Treasury could indeed temporarily lower long-term yields and narrow the 30-year/10-year yield spread, this effect is more short-term.
Currently, Treasury Secretary Bessant is pushing for long-term repurchases at a frequency of nearly three times per month, with the largest single repurchase doubling to $4 billion, which is still small relative to the overall US Treasury market. Even further adjustments to the term structure, such as Operation Twist (where the central bank or Treasury sells short-term debt and buys long-term debt), are likely to have a rapidly diminishing effect. Looking back at Operation Twist in 2011-2012, long-term yields and the yield curve did initially decline significantly after the policy was introduced, but fundamentals regained dominance after a few months, and the impact of the second round of operations was even weaker.
In summary, the Treasury has the tools and can create temporary supply and demand changes, but it cannot truly alter the long-term term premium. Global capital flows and macroeconomic fundamentals will eventually re-establish equilibrium. If investors believe that long-term bonds do not adequately compensate for inflation risk, or if the value of bonds as a stock hedge declines, the demand generated by Treasury buybacks will ultimately be offset by reduced allocations by private investors.
