The U.S. Treasury is expanding a bond-buying program meant to pull down long-duration yields, but persistent inflation, a more volatile Federal Reserve, and a national debt above $40 trillion are working against it, according to a Motley Fool opinion piece. The 30-year Treasury yield has recently touched a 19-year high even as stock indexes sit at record levels.
Treasury Secretary Scott Bessent doubled the department's scheduled long-duration bond repurchases from $2 billion to $4 billion on Aug. 19, an effort to push down 10-, 20-, and 30-year Treasury yields that have climbed all year. The Treasury has also reportedly considered tapping its $950 billion General Account for more aggressive buybacks, since purchasing bonds tends to lift prices and weigh on yields.
Inflation keeps yields elevated
Inflation hit a three-year high of 4.2% in May, driven mainly by the Iran war and the closure of the Strait of Hormuz, with tariffs adding further pressure on consumer prices. Core Personal Consumption Expenditures data has stayed sticky, suggesting the price pressure has become entrenched rather than a temporary energy shock. Because bond investors demand higher yields to offset lost purchasing power, efforts to lower long-term bond yields would likely fail without a significant reduction in Core PCE relative to the Federal Open Market Committee's 2% target.
A less predictable Fed adds volatility
Fed Chair Kevin Warsh, sworn in on May 22, has removed forward-looking guidance from FOMC meeting statements, a practice that had been standard for more than two decades. Without that guidance, bond traders are left to anticipate policy moves on their own, which has made the bond market considerably more volatile. That volatility is not expected to ease as long as the Fed withholds forward guidance.
National debt tops $40 trillion
U.S. total debt surpassed $40 trillion for the first time on Aug. 19. The federal government has run a deficit every year since 1970 except for four years under President Bill Clinton, and deficits over the last six years have ranged from $1.37 trillion to $3.1 trillion annually. Rising long-duration yields partly reflect bond traders demanding a bigger premium for the growing risk tied to that debt load, and even the full $950 billion General Account would barely dent the total.
Source: The Motley Fool
Trading involves risk.
Risk Disclaimer
