What does Bessent’s Treasury buyback plan mean for mortgage rates?

Yields on longer-term government debt declined from recent peaks on Wednesday following the U.S. Treasury Department’s announcement it would be “at least” doubling the size of longer-dated debt repurchases it makes in coming months.

The announcement ultimately calmed a bond market sell-off that began earlier in the week and accelerated Tuesday.

Yields on 30-year Treasurys climbed to 5.33% during the day on Tuesday, their highest levels since 2007, before declining to about 5.18% by market close on Wednesday. Pressure on 10-year yields, meanwhile, has been climbing since the end of July, when they closed out the month around 4.4%.

“This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations,” said the department in a statement.

After nearing 4.75% on Tuesday, 10-year yields to which mortgage rates are typically benchmarked had eased to 4.64% by the end of trading on Wednesday, in the wake of the buyback announcement.

Treasury faces oversupply of bonds

The buybacks, which were increased from a maximum $2 billion per operation to $4 billion effective Sept. 9, are aimed at the 10- to 30-year stretch of the Treasury curve, which includes 20-year bonds.

Bond markets are awash in long-term offerings amid an ongoing surge in AI-related corporate debt issuance and increasingly stale Treasury debt. This has led to “overcrowding” at the long end of the curve, whereby too many bonds are competing for too few investor dollars.

“Oversupply is never a good thing,” says Seth Sprague, director of mortgage banking services at tax audit and advisory firm Richey May. “There’s only so deep a pool of bond investors, whether they want Treasurys or mortgage-backed securities, and overflooding of that market can only lead to one thing: higher rates.”

The unexpected announcement sends a flurry of other signals to the market that Sprague says could be concerning. Higher inflation expectations are a baseline of the current market, and the Trump administration is fixated on keeping interest rates down, especially ahead of looming midterm elections in November.

“For the Treasury to have to step in and try to buy their stuff back and throw it back on a balance sheet, I’m pretty sure that’s not what they wanted to do this year,” says Sprague. “That may speak more to the global demand for interest rates, which points to what the Mortgage Bankers Association and others have said that it’s just really hard to get mortgage rates down.”

Global pressures weigh on Fed policy

Other experts who spoke with Scotsman Guide say mortgage markets should not interpret the Treasury Department’s increased buybacks as delivering lasting calm in the bond market.

“He panicked,” says Chris Whalen, chairman of financial consultancy Whalen Global Advisors, referring to U.S. Treasury Secretary Scott Bessent. “It was symbolic, an academic exercise. It doesn’t make a difference when you look at the size of the Treasury market.”

The market for outstanding Treasurys stood at roughly $32.2 trillion as of Tuesday, according to the latest Treasury Department figures. As much as 40% of that debt is illiquid, low-coupon debt, says Whalen, issued prior to the Federal Reserve raising interest rates in 2022.

Driving the latest bond sell-off are near-term and long-term inflationary pressures linked to energy supply shocks from the Iran war, a growing pile of U.S. debt and massive spending on artificial intelligence, analysts say. But pressures on Treasurys driving up mortgage rates also have global catalysts.

“Inflation caused by the Iran war has been rippling through all of these economies, and the bond market is going to do its own thing,” Whalen believes, citing very active foreign currency swap markets. “Kevin Warsh is not willing to talk about raising rates, but eventually he’ll have his hand forced.”

‘Playing games’ with the Treasury curve

The march higher in Treasury yields over the past week is part of a broader recalibration in the bond market as a result of the U.S. amassing, as of Wednesday, $40 trillion in outstanding total debt.

Much of that debt was issued at very low interest rates, which the U.S. now must refinance in a higher — and potentially increasingly higher — rate environment.

While Fed Chair Kevin Warsh has talked tough about bringing down inflation early in his tenure, inflation has remained above the Fed’s stated 2% target for more than five years, and so far the new central bank chief has not acted to bring rates down.

“It feels to me like they’re playing games, trying to get the long end of the curve to come down,” says Chris Thornberg, founding partner at analytics firm Beacon Economics, reacting to Wednesday’s Treasury Department announcement.

Doing so involves buying back 10- to 30-year bonds and paying for that by releasing shorter-end securities, Thornberg explains. But as the duration of outstanding Treasurys falls, the more quickly higher interest rates will feed into interest payments, theoretically marching the U.S. economy toward a fiscal debt crisis that much sooner.  

“You get very little in the short run outside of trying to cover up the fact that the bond markets are trying to respond to the problem we have,” Thornberg explains, “by making us more at risk to the problem we have.”

Mortgage rates poised to move higher

The manner in which volatile fiscal and monetary policies impact mortgage rates will likely align with market fundamentals observed over the past several quarters. The general trend is higher, according to those who spoke with Scotsman Guide, but the speed and severity at which investors will demand higher yields for home lending remains to be seen.

“The recent sell-off appears to reflect a combination of concerns about long-term Treasury supply, the federal deficit, and broader macroeconomic factors more than a sudden change in mortgage fundamentals,” says Mike Vough, senior vice president of corporate strategy at Optimal Blue, a mortgage capital markets firm.

With average mortgage rates on typical 30-year home loans roughly 40 to 50 basis points higher in the third quarter compared to February levels, the ongoing Iran war, widening federal deficits, rampant AI spending and a growing uncertainty premium point to little relief for home financing costs.

While the impact of Wednesday’s announcement will be “indirect,” according to Vough, nothing about the announcement eliminates the underlying pressure on bond yields, with which mortgage pricing ultimately has to compete. Growth in investor demand for mortgages, however, could mute Treasury volatility.

“Lenders will need to stay vigilant as these dynamics evolve and manage their exposure accordingly,” added Vough. “Borrowers should expect some volatility in mortgage rates, but the headline moves in long-dated Treasurys won’t necessarily translate one-for-one into mortgage rates.”