The US Treasury's decision this week to double its long-term debt buybacks — and the move's impact on broader markets — has already been discussed at length. Treasury Secretary Bessent even went as far as to suggest that the department might do more and take further action if needed, on the basis that "yields do not reflect underlying fundamentals."

The stakes reach beyond one corner of the bond market. Treasury yields serve as the benchmark for everything from mortgage rates to corporate borrowing costs, which is why any attempt to reshape pricing in the world's largest government bond market draws close attention well beyond Treasuries themselves.

While the action by the US Treasury appears straightforward enough, there are potential risks attached to it — which makes it not so much a move that goes unpunished if officials keep jerking markets around in this manner. As ForexLive's earlier commentary noted here, the buybacks can create a moral hazard of sorts and could also affect funding markets. Building on those points, it is worth spelling out what unintended consequences may crop up and bite at markets down the road.

Moral hazard and the "Bessent put"

The first risk is moral hazard, in the sense that a "Bessent put" now acts as a backstop for the Treasury market. The label borrows from an old piece of market shorthand — the "Fed put" — the belief, dating back to the central bank's rate cuts after the 1987 crash and the 1998 Long-Term Capital Management episode, that policymakers will step in to cushion falling prices. In that sense, it gives traders and investors a false sense of security — the belief that the US administration has got their back in going up against the market.

But as highlighted before, buybacks of $4 billion, or even more than that, are but a drop in the bucket compared with the massive Treasury market of over $30 trillion. Worth noting is that buybacks themselves are not new: the Treasury ran a repurchase programme from 2000 to 2002 and revived it in May 2023, with the stated aims of cash management and supporting liquidity in older, off-the-run securities. A willingness among traders and investors to take more leveraged and riskier positions could therefore open a can of worms — especially if they believe the government will always be their "buyer of last resort." If leveraged trades get out of hand, the analysis warns, things will get genuinely ugly when stress finally hits and many traders are caught out by over-leveraged positions.

An unintended overlap with Fed monetary policy

The next point is an unintended overlap with Federal Reserve monetary policy. Typically, yield control falls within the domain of central banks — and history fits that template. The Fed itself pegged long-term Treasury yields from 1942 until the 1951 Treasury-Fed Accord ended the arrangement, and the Bank of Japan capped its 10-year yield from 2016 before formally abandoning yield curve control in March 2024. The US Treasury is meant to address the fiscal side of things instead, and not focus so much on yield levels — yet here we are.

This complicates and blurs the lines over who is handling what when it comes to US policy setting. In the bigger picture, it is a major red flag for both central bank independence and the handling of government debt. Then again, the commentary suggests it may be a good thing that markets have come to associate everything in the US with one man. All in all, though, it is another big blow for the US dollar amid credibility issues and incoherent policy setting.

Potential threat to funding markets

There is also the question of how all of this feeds through to other parts of the financial system, with the buybacks potentially threatening funding markets.

In performing the buybacks, the government is essentially trading interest rate risk for liquidity risk. The debt burden shifts towards shorter durations, as the Treasury needs to fund the buybacks via T-bills.

That forces dealers to absorb bigger amounts of T-bill issuance, which risks draining excess cash in money markets. In practice, dealers — that is, banks — are forced to hold more T-bills and have reduced amounts of cash to lend out to other institutions for overnight funding. All it takes is one timing mismatch and/or a temporary cash shortage, and that would be enough to blow up the "plumbing" of the funding and repo markets — as happened in 2019, when overnight repo rates spiked to around 10% in September of that year, forcing the Fed to step in with repo operations and T-bill purchases to restore order.

Fueling inflation pressures

Lastly, there is the issue of fueling inflation pressures and distorting the reality in markets even further.

By "artificially" suppressing bond yields and its own borrowing costs, the government would continue to pump more cash into the economy and stimulate demand conditions further. Adding to that is the distortion in which yields are not enough to cover inflation pressures. In turn, that would lead to more spending from consumers and businesses as they try to make up for the fact that holding cash effectively becomes a losing game — which would also drive prices up if the narrative plays out for a bit longer.

The bottom line

To sum up, it is not that the US Treasury move is without any risks. There are potential risks and unintended consequences — just ones that may not be obvious and evident to markets just yet. The checkpoints from here are all publicly observable: Treasury's quarterly refunding statements and weekly buyback operation calendars, the share of T-bills in outstanding debt, and overnight funding rates such as SOFR — the gauge that first flashed trouble in 2019.