US Treasury may use nearly a trillion dollars to support the bond market

The US Treasury Department may utilize its General Account (TGA), which currently holds about $950 billion, to help fund its plan to increase purchases of government bonds, according to two senior Treasury officials. Using funds already in the government's coffers could give the Treasury more significant power to influence long-term bond yields at a time when the US debt market is under pressure.

Last week, the Treasury surprised markets by announcing it would double the volume of buybacks of government bonds that are no longer issued on a regular basis, at the long end of the yield curve. The volume of purchases will increase from $2 billion to at least $4 billion. Treasury Secretary Scott Bessent told CNBC that the volume of activity could be even higher than the new minimum threshold. This move is intended to influence the bond market structure by purchasing existing securities, and thus may support bond prices and reduce their yields.

While the Treasury did not specify how the purchases would be funded, most market participants assumed the Treasury would fund them by selling short-term Treasury bills. Treasury officials did not rule out this possibility. Bessent himself called the activity "Treasury Twist," referring to a move where the government buys long-term bonds and funds the purchase by issuing short-term debt. This means the Treasury will effectively replace short-term debt with long-term debt, without necessarily increasing the total amount of debt. However, since the initial announcement, bonds have retreated from the gains recorded, and yields have returned to rising, leading to market skepticism regarding the effectiveness of the move.

Using the TGA could change the picture. It is effectively the US government's checking account, held at the Federal Reserve. The money in the account has already come from taxes collected, so using it does not require immediate raising of new sources in the market. Since taking office, Bessent has increased the account balance to about $950 billion, compared to a target of about $550–600 billion that was customary during the Biden administration.

Officials refused to say how much of the account's funds might be used for purchases, or when a decision on the matter would be made. They noted there was no indication that the TGA would be used for purchases exceeding the bonds that are no longer issued on a regular basis. However, they clarified that the funds in the account are considered an available source of funding. Apparently, some reduction in the TGA balance does not create an immediate risk. The downside is that the government will have less cash available in the event of a future confrontation over the debt ceiling. However, according to current estimates, the debt ceiling is not expected to become a constraint before next winter, giving the Treasury time to rebuild the balance if necessary.

Beyond the direct impact of using the funds, the very recognition that the Treasury can use the TGA to buy bonds may influence the market and reduce concerns that the Federal Reserve will be required to assist the Treasury. The first purchases are scheduled to begin on September 9. Bessent stated last week that the goal is to get investors to "focus on the fundamentals and not trade on headlines" during a period when the market is thin. He added that he expects an improvement in the deficit situation after revenue from tariffs begins to return, and that senior administration officials are expected to meet soon to formulate plans to improve the fiscal situation of the US.