The US Treasury Department expands the scale of long-term debt repurchases or increases the risk of inflation Analyst: The Federal Reserve faces a more complex policy environment

US Treasury Secretary Bezent is taking a series of measures to reduce long-term US Treasury yields.

The Zhitong Finance App learned that the US Treasury Department announced on Wednesday that it will expand the scale of long-term treasury bond repurchases to quickly ease the recent selling pressure on the US bond market. However, market participants warned that although this policy helps reduce long-term financing costs, it may increase the risk of inflation and make Federal Reserve Chairman Walsh's monetary policy work more complicated.

The US Treasury Department announced on Wednesday that it will raise the upper limit of a single repurchase of long-term treasury bonds from 2 billion US dollars to at least 4 billion US dollars, with a focus on treasury bonds with maturities of 10 to 30 years. After the news was announced, long-term US bonds, which had continued to be sold recently, quickly rebounded, and yields declined markedly.

Recently, US bond yields have continued to rise, drawing attention from the global market. Investors worry that higher long-term interest rates will not only further exacerbate housing affordability problems for American households, but will also push up corporate financing costs, threaten stock market gains, and increase the pressure on the US government to pay interest on huge debts.

Although the scale of this repurchase is still limited compared to the overall size of the US Treasury bond market, many investors see it as an important policy signal of Bezent's long-term push to reduce 10-year and other long-term US bond yields.

However, this strategy has also sparked controversy. Economists and bond traders believe that if the Treasury continues to reduce long-term interest rates by adjusting the debt structure, it may stimulate economic activity and increase inflationary stickiness, and at the same time make US government debt financing costs more vulnerable to changes in short-term interest rates. Furthermore, it could also put more pressure on the Federal Reserve to maintain its policy independence.

Joseph Brusuelas, chief economist at RSM US, said that the policy is gradually moving in a direction that may require the central bank to support fiscal goals. He believes that the intervention of the Ministry of Finance may distort the market and cause the Federal Reserve under Walsh to face a more difficult policy environment.

US President Trump has asked the Federal Reserve to cut interest rates many times before to reduce the federal government's debt financing burden. Meanwhile, the US fiscal deficit continues to widen. According to estimates by the US Congressional Budget Office (CBO), the federal budget deficit is expected to reach 2.1 trillion US dollars this fiscal year. Currently, the amount of US federal debt held by the public is about 32.2 trillion US dollars.

From an official perspective, the US Treasury Department emphasized that the main purpose of treasury bond repurchases is to improve market liquidity. Newly issued US Treasury bonds are usually actively traded, but the liquidity of some old securities will gradually decline over time. By repurchasing these long-term treasury bonds that have been issued for a period of time and have low trading activity, the Ministry of Finance can free up balance sheet space for financial institutions and enable them to buy newly issued treasury bonds with higher liquidity, thereby improving market operation.

This operation is not equivalent to quantitative easing by the Federal Reserve. The Treasury cannot create money to buy bonds like the Federal Reserve, so it needs to finance repurchases through other debt. Wellington fixed income portfolio manager Brij Khurana pointed out that the Treasury needed to fund the buyback by issuing new treasury bonds.

The crux of the dispute is that the market anticipates that the Ministry of Finance may issue more short-term treasury notes to fund the repurchase of long-term treasury bonds. This actually means that the US government's debt structure may be skewed further from long-term bonds to short-term debt. However, the Ministry of Finance did not specify how it will fund the expansion of repurchases at this time.

After the news was announced, the US bond market quickly rebounded. Since the outbreak of the war in Iran, the 10-year US bond yield has risen by a cumulative total of nearly 70 basis points. Recently, it reached a high of about 4.74%, and has pushed the interest rate on US 30-year mortgage loans to about 6.75%. After the Ministry of Finance announced the expansion of repurchases, the 10-year yield fell to 4.63% for a while, and finally settled at around 4.65%.

Expanding the repurchase of long-term treasury bonds is not the only recent attempt by Bezent to ease pressure on long-term yields. In July, the US Treasury used funds to support the yen and chose to sell the euro instead of the US dollar in related operations; Bezent also urged the Federal Reserve to expand the relevant mechanism so that when Japan interferes in the foreign exchange market in the future, it can obtain capital by mortgaging US Treasury bonds rather than directly selling US bonds.

On August 5, the US Treasury Department also stated that it will continue to maintain a financing structure that is relatively biased towards issuing short-term debt. Currently, short-term treasury notes account for about 22.2% of US outstanding treasury bonds, which have already exceeded the upper limit of about 20% previously recommended by the US Treasury Borrowing Advisory Committee (TBAC).

Notably, in 2024, Bezent criticized his former US Treasury Secretary Yellen for adopting a similar strategy to reduce long-term financing costs by increasing the issuance of short-term treasury notes, believing that this practice is tantamount to artificially influencing the market. Walsh has also previously criticized the Federal Reserve's bond purchases for depressing yields, believing that this may reduce the restraint on excessive government spending.

The US Treasury's Borrowing Advisory Committee also warned earlier that the treasury bond repurchase policy should not be politicized. The committee believes that if repurchases are reasonable to solve market liquidity problems, buybacks should not be used to change the structure between the US government's long-term and short-term debts. It believes that debt issuance itself should be the main tool for managing the debt maturity structure.

This shift in debt structure may pose long-term risks to the US treasury. According to CBO data, in the first 10 months of fiscal 2026, the US federal government's net interest expenditure reached 963 billion US dollars, accounting for about 15% of fiscal expenditure. If the government further increases its share of short-term debt, once the Federal Reserve raises interest rates in the future, large amounts of short-term debt will need to be refunded at higher interest rates, and government interest expenses may rise rapidly.

At the same time, lowering long-term interest rates may itself stimulate demand, making it harder for inflation to fall back. Khurana said that this may increase the risk of continued high inflation and force the Federal Reserve to maintain a higher policy interest rate for a longer period of time.

The US dollar fell nearly 0.8% against a basket of major currencies on Wednesday after the Ministry of Finance announced the expansion of repurchases. Khurana pointed out that if the US dollar continues to weaken, it will further increase inflationary pressure in the US by raising the price of imported goods.

This also left Walsh facing a more complicated policy environment. Walsh said earlier that he hoped market prices would provide a more direct signal for monetary policy, and expressed concern at a press conference on July 29 that inflation was higher than the Federal Reserve's 2% target for more than five consecutive years. However, he did not support an interest rate hike at the time, nor did he clearly state what conditions would push him to change its policy position.

Brusuelas believes that if the Treasury continues to reduce long-term yields through repurchases and adjustments to debt maturity structures, the market signals released by US bond prices may be disrupted, making it more difficult for the Federal Reserve to judge the real financial environment.

Walsh is expected to deliver a speech at the Jackson Hole Global Central Bank Annual Meeting next week. At that time, the market will pay close attention to how he evaluates recent fluctuations in long-term US Treasury yields, Treasury intervention, and inflation risks. As the size of the US fiscal deficit and debt continues to expand, the Treasury's policy tension between reducing financing costs and the Federal Reserve controlling inflation may also become an important risk factor for the US financial market in the future.