The U.S. Treasury is making a bigger move in the bond market after long-term interest rates climbed to their highest levels in nearly two decades. The action may sound far removed from everyday finances, but those rates help influence what Americans pay for mortgages and other loans.
Beginning September 9, Treasury will at least double the size of some of its bond buybacks — essentially purchasing older government bonds that have become harder to trade as newer ones enter the market. The goal is to keep the massive U.S. Treasury market operating smoothly at a time when investors are demanding higher interest rates to lend the government money for long periods.
The announcement produced an immediate reaction. Long-term Treasury yields dropped Wednesday after the 30-year yield had climbed to its highest level since 2007. But the relief has already begun to fade Thursday, underscoring the limits of the move: Treasury can improve liquidity in the bond market, but it cannot simply make concerns about inflation, federal borrowing and government debt disappear.
For American households, those long-term yields matter because they influence rates on mortgages and other forms of credit. They also affect what businesses pay to borrow and what Washington itself must pay to finance the federal debt. Treasury currently expects to borrow $739 billion in privately held marketable debt during the July-through-September quarter alone, $68 billion more than it projected in May.
The Readovia Lens
The most revealing part of Treasury’s decision may be its timing. A government bond market normally operates far outside the attention of most Americans, but long-term yields have climbed enough that Treasury is now expanding a program intended to keep that market running smoothly. The larger buybacks may relieve some pressure inside the market; they do not solve the underlying challenge of expensive government borrowing. As long as investors demand unusually high yields to lend money for decades, those costs can continue working their way from Washington into the broader economy.
