Editor's Note: On August 19, the U.S. Treasury announced an expansion of the long-term Treasury bond liquidity support repurchase agreements, increasing the single-time repurchase amount for 10-20 year and 20-30 year nominal coupon Treasury bonds from a maximum of $20 billion to at least $40 billion. Prior to the announcement, the 30-year Treasury bond yield rose to 5.337%, reaching a nearly 19-year high; after the news was released, the long-term yield briefly fell back.
$40 billion is not a large amount relative to the vast U.S. Treasury market. The new variable comes from a funding source: according to media reports citing Treasury officials, the Treasury General Account (TGA) with a balance of approximately $940 billion can provide funding for the expanded repurchase agreements. By directly using existing cash, the Treasury can temporarily avoid immediate issuance of short-term debt, giving the Treasury "twist operation" more operational flexibility than initially expected by the market.
However, understanding the TGA as nearly $1 trillion of "repurchase ammunition" may overestimate its actual capacity. The TGA is the primary cash account for the federal government to pay wages, contract funds, and Treasury interest and principal, and it also covers expenditure demands such as tariff refunds. Once the account balance significantly declines, the Treasury will still need to replenish it through fiscal revenues or additional debt issuance. While it can adjust financing timing and bond supply structure, it cannot eliminate financing needs.
Sage Advisory focuses in this article on this contradiction: the TGA can help the Treasury temporarily alleviate long-term liquidity pressure, but fiscal deficits, long-term Treasury supply, and AI infrastructure financing are still competing for global capital. How much "ammunition" Benson has depends on how much cash the Treasury is willing to use; how long this round of support can last will depend on whether future additional bond supply when replenishing the TGA will once again push the pressure back onto the market.
The following is the translation of the original article:
On August 19, the U.S. Treasury announced an expansion of long-term Treasury bond repurchases. Treasury Secretary Janet Yellen subsequently referred to this arrangement as the "Treasury Twist," attempting to ease liquidity pressures in the long end of the market as the 30-year Treasury bond yield approached its highest level since 2007.
According to the Treasury's announcement, the single-time liquidity support repurchase amount for 10-20 year and 20-30 year nominal coupon Treasury bonds will be increased from a maximum of $20 billion to at least $40 billion. The new arrangement will take effect on September 9 and last until November 4.
Following the announcement, the 30-year Treasury bond yield experienced a significant drop before partially recovering, but it still did not revisit the pre-announcement high. Sage Advisory concluded that the Treasury Department's statement had at least temporarily interrupted the rapid rise in long-term yields.
However, the expanded repurchase has not officially begun. The post-announcement market mainly reflected advance trading based on the policy signal, and cannot be directly interpreted as actual buying pressure pushing down yields.
$40 Billion Is Just the Beginning; Market Focuses on $940 Billion TGA
The Treasury Department's initially announced repurchase size was relatively limited.
When the Federal Reserve previously conducted Operation Twist, it involved adjustments to the balance sheet totaling trillions of dollars; the Bank of Japan's Yield Curve Control (YCC) has clear yield targets and uses its balance sheet for support.
Unlike previous operations, the Treasury Department's repurchase this time does not have a similar scale or price target, and the executing body is not the Federal Open Market Committee responsible for monetary policy. The formal purpose stated by the Treasury Department in the announcement was to enhance market liquidity for long-dated securities, without committing to controlling the 30-year yield at a specific level.
What truly shifted market expectations is the TGA.
According to media reports citing two senior Treasury Department officials, the Treasury Department can use the nearly $1 trillion balance in the TGA to provide funding for the expanded long-term bond repurchase. As of August 19, the account balance was approximately $940 billion.
The TGA serves as the U.S. federal government's primary cash account held at the Federal Reserve, used for daily expenditures such as civil servant salaries, government contract payments, and debt servicing. If the Treasury Department directly uses the existing cash in the account to repurchase long-term bonds, it would not need to issue more short-term debt immediately to raise funds.
This scenario makes the potential scope of the "Treasury Department Operation Twist" appear larger than a one-time $40 billion. The market is beginning to consider whether the Treasury Department might further expand repurchases in the face of continued long-end pressure and utilize the TGA as a buffer tool.
However, current public information can only confirm that the TGA could be a potential funding source. The Treasury Department has not disclosed how much cash it plans to use, nor has it allocated a specific near-trillion-dollar amount for repurchases. Therefore, the $940 billion represents potential liquidity headroom and should not be directly equated with "ammunition" that can all be used to purchase long-term bonds.
The Ammunition Provided by the TGA Depends on How Much Cash the Treasury Department Wants to Retain
The TGA balance appears substantial, but its actual usable scale is subject to multiple constraints.
First, the TGA serves as the federal government's daily payment function. The Treasury Department needs to maintain sufficient cash to address government operations, debt interest payments, and the timing mismatch between revenue and expenditure.
Second, the current TGA also corresponds to specific expenditure needs. According to Reuters, the Treasury Department needs to refund around $166 billion in tariff payments to importers. A higher account balance can also provide the government with a larger cash buffer during debt ceiling negotiations or fiscal revenue fluctuations.
This means that the Treasury Department cannot simply invest nearly a trillion dollars of the TGA in Treasury buybacks. The actual amount that can be utilized depends on the Treasury's minimum cash balance, future tax inflows, government spending, and other temporary funding needs.
Even if the Treasury Department decides to significantly reduce the TGA balance, this operation also has a limit. Once the account cash is depleted, it still needs to be replenished through tax revenues or additional Treasury issuances.
From this perspective, the TGA is more akin to a time management tool: it allows the Treasury Department to temporarily separate buybacks from new debt issuance, reducing the need for simultaneous short-term supply expansion but not fundamentally altering the government's financing gap.
Cash Buybacks Can Delay Debt Issuance, but Debt Supply Will Eventually Return
Besançon refers to expanding long-term buybacks as a "Treasury Department unwind operation," borrowing the idea of traditional unwind operations that alter the debt maturity structure: buying long-term bonds while maintaining funding balance by cash or increasing short-term financing to improve long-end liquidity and alleviate yield pressure.
However, there is a key difference between the Treasury Department and the central bank. The Federal Reserve can create base money, while the Treasury Department can only use existing cash or fund through issuance.
If the Treasury Department finances long-term buybacks through new short-term debt, the result is a reduction in the circulation of some long-term old bonds while increasing the supply of short-term Treasury bills; if the TGA is used instead, the timing of new issuances can be delayed, but the account balance will eventually need replenishment.
Therefore, this arrangement mainly alters the tenure and timing distribution of bond supply, rather than the U.S. government's net financing needs.
Besançon has made it clear that the Treasury Department will continue to carry out the regular Treasury auction plan announced in early August, including long-term Treasury issuances. Expanding buybacks does not mean the Treasury Department will cease issuing long bonds, nor does it mean the reduction of the U.S. government's debt stock.
Sage Advisory believes that the TGA can expand the Treasury's short-term intervention space but cannot address the underlying pressure from persistent fiscal deficits and government debt growth. While the Treasury Department buys back less liquid long-term old bonds, it still needs to raise funds through regular auctions. The ultimate variable determining market pressure is still the overall bond supply.
The Longevity of the Baker Street Accord Depends on Global Capital Competition
In the author's view, the Treasury's recent action should not be seen in isolation.
During Baker's tenure, there have been several instances of a stronger inclination toward market intervention, including involvement in stabilizing the yen, discussions on supporting international dollar liquidity through swap arrangements, and using long-term bond repurchases to influence the yield curve.
While these operations vary in scale and mechanism, they collectively convey a policy preference to the market: when there is significant volatility in exchange rates, dollar liquidity, or long-term funding costs, the Treasury is willing to use existing tools to alleviate market pressure.
Furthermore, the author argues that as the Fed reduces its active management of financial conditions and delegates more price discovery to the market, the Treasury is becoming a new policy variable influencing asset pricing. Market participants now not only have to assess inflation, economic growth, and the Fed's rate path but also evaluate under what conditions the Treasury might adjust the scale of repurchases, the debt maturity structure, or the TGA balance.
However, while the Treasury can influence the long end of the market, it struggles to control all the forces propelling long-term rates higher.
On one hand, governments worldwide need to finance large fiscal deficits and growing debt stocks; on the other hand, tech companies and infrastructure operators are investing heavily in AI data centers, chips, networks, and power projects. The simultaneous expansion of financing needs by the government and the private sector constitutes what the author calls "global capital competition."
When the demand for long-term funding outpaces supply growth, investors typically demand a higher term premium, representing the additional return required to hold long-term bonds and bear inflation and rate uncertainty. This is also a key reason why long-term yields may persist above the implied level from the policy rate.
The TGA can assist the Treasury in increasing demand for long-term bonds at specific stages and may help mitigate the speed of yield increases during liquidity strains. However, if the fiscal deficit continues to expand, long-term bond supply does not decrease, and AI infrastructure financing remains on the rise, capital competition will continue to exert pressure on long-term funding costs.
Going forward, the market will need to focus not just on how many basis points a single repurchase can push down but on whether the Treasury will continue to expand long-term repurchases, utilize TGA funds effectively, and alter the issuance structure of long- and short-term bonds in subsequent quarters.
If the repurchase scale keeps growing, the TGA balance significantly declines, Baker's intervention in the long end of the market will shift from a policy signal to actual fund operations. If, after the expansion of repurchases, long-term yields continue to rise, it signifies that structural pressures from the fiscal deficit, debt supply, and private financing demand have exceeded the cushion the TGA can provide.
The nearly $1 trillion TGA can buy time for the Treasury Department, but it cannot replace fiscal consolidation. Whether Powell can hold up the US debt ultimately depends on whether, during this period of buffer, the US demand for long-term capital can truly decrease.
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