What to know:
- US Treasury is considering using part of its nearly $1 trillion TGA balance to fund larger long-term bond buybacks.
- The Treasury has raised the minimum buyback size to $4 billion, with purchases potentially exceeding that amount.
- Using TGA funds could reduce the immediate need to issue short-term Treasury bills to finance the program.
US Treasury is considering using part of its nearly $1 trillion TGA balance to fund larger long-term bond buybacks.
The Treasury has raised the minimum buyback size to $4 billion, with purchases potentially exceeding that amount.
Using TGA funds could reduce the immediate need to issue short-term Treasury bills to finance the program.
The US Treasury is exploring the possibility of using some portion of its $1 trillion cash pile to fund more buying of long-dated government bonds. The initiative will help the agency gain some room for maneuverability to affect long-term interest rates amid growing questions on the scope and financing of the new repurchase program.
US Treasury Considers TGA Funding
In an article by CNBC, two high-ranking US Treasury officials revealed that the department had the option to use the funds in the Treasury General Account (TGA) in order to fund the acquisition of older and less liquid Treasury bonds.
Recently, the US Treasury declared that the minimum size of the buybacks had doubled to a minimum of $4 billion. The Treasury Secretary Scott Bessent added that the buybacks could surpass this minimum, but the means of funding such a large-scale program were yet to be disclosed.
One of the possibilities expected by many market players is for the government to issue more Treasury bills to finance the purchases. This was termed the “Treasury Twist” by Bessent, whereby longer-term investments were to be bought through the issuance of shorter-term debt instruments.
But the government officials have hinted at using the TGA for this purpose. The amount and the timing of the final decision have not been revealed yet.
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Large Cash Balance Gives Treasury More Options
The TGA serves as the primary bank account for the federal government and is maintained with the Federal Reserve. The balance in it has been raised by Bessent to about $950 billion, which is far more than the $550 billion to $600 billion targeted during the previous administration.
Part of this cash can be used to fund the Treasury’s buyback program without resorting to debt issuance right away.
But if the agency wants to reconstruct the TGA to its present value, it will have to get more money via bond issues. This could happen at a later date through Treasury borrowing.
But according to the officials, there is no immediate issue of funding arising from reducing the value of the TGA. Estimates show that the next ceiling on debt would occur in winter or spring of next year.
The US Treasury has likewise brushed aside fears regarding the necessity for the Federal Reserve to intervene. While the TGA is held by the Fed, it is not seen as part of its monetary policy.
Bond Yields Remain a Key Concern
Treasury bonds saw initial gains following the buyback announcement but then changed direction and caused bond yields to rise. It has been uncertain if the increased buyback program will be big enough to make any difference in the bond market.
TGA access could alter this expectation by making sure that there is a lot of cash available to the US Treasury for the buybacks.
Moreover, the department has justified the timeliness of the announcement. Officials say that there were no alterations to the official schedule of the auction, since the first buyback will take place only on September 9. In addition, the August 19 announcement provides time for the investors to get prepared for the program.
This new buyback program comes amid the attention of the markets to the issues of inflation, deficit, and the supply of longer-term bonds. Changes in inflation expectations, yields of Treasuries, and the dollar have stressed the need for the debt management strategy of the US Treasury.
In case the department decides to use part of its TGA balance, this may turn out to be a significant event in the bond market.
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