Having seen yields rebound from their initial decline following the upping of Treasury (long-end) buybacks to 'at least $4BN' per operation (and increased its total planned operations), Treasury Secretary Scott Bessent jawboned late last week about his 'bigger toolkit' and 'asymmetric information' in an attempt to further strengthen the 'Treasury Put'.

Unfortunately for him, the market (vigilant as ever), decided to test him with yields ending the week at the highs.

So this morning, two senior Treasury officials told CNBC that Treasury could use its near $1 trillion General Account (TGA) to help fund the bond buybacks.

Using the TGA would provide the Treasury with considerable firepower to influence long-term bond yields and reassure the market of its ability to influence rates (since last week's announcement made no mention of how it would fund the purchases).

As CNBC notes, most market participants assumed it would do so by selling short-term bills. The senior Treasury officials did not rule that out. Bessent in the CNBC interview called the operation a “Treasury Twist,” a reference to a government or Fed operation where long-term treasuries are bought and paid for with short-term issuance. That also implied that short-term bonds would be sold.

Using the TGA could change that perception. The TGA is essentially the government’s checking account, a rainy-day fund of sorts held at the Fed. It is already funded with existing tax collections. Bessent has built up the TGA to around $950 billion currently, compared with a stated goal under the Biden administration of around $550 to $600 billion.

Additionally, using the TGA would limit any concern, also voiced by some bond market participants, that the Fed could be asked to help the Treasury in such operations. 

The officials would not say how much, if any, of the TGA would be used or when such an announcement could be made.

The reaction was actually quite modest in bonds (short-end yields up, long-end down, flattening of the curve)...

Curve flattened...

The reaction in bonds is a little odd, given that, as Bloomberg macro strategist, Simon White, notes that the use of the TGA means this is no longer a twist operation in its purest sense.

The difference is that bills still have a duration. The reserves exchanged to buy those bills cannot be used again until the government pays back the obligation.

Actually, this is not entirely true due to repo, but the distinction is still important: buying longer-term Treasuries using the TGA is no longer strictly reserve neutral.

On balance, this adds to inflation pressures. The amounts involved are small, but if anything it means slightly higher longer-term yields, counter to the small drop we saw in them after the CNBC headline hit.

Additionally, the rise in short-term yields runs somewhat counter to expectations (less implied short-end supply required to fund the twist would suggest short-end yields would drop).

Stocks popped...

“The decision to increase long-end buybacks itself was not necessarily radical, but the timing and framing of the decision certainly were,” Lou Crandall, a senior economist at Wrightson ICAP LLC, wrote in a note Monday.

The Treasury for years has focused on assuring investors it “would not manipulate the market for its own short-term benefit,” said Crandall.

“That promise went out the window last week.”

Translation:

And that's why gold and bitcoin are bid too.

And likely a cleaner 'QE trade' bet than a bond-based one as Goldman warned last week the 'term premia' is here to stay.