Treasury Buybacks Offer Short-Term Rate Relief, but Long-Term Costs Feared

The U.S. Treasury's buyback policy may lower rates for now, but critics say the price paid later could be too high. It has been likened to drinking salt water when thirsty, and some have described it as a 'deal with the devil' that could carry a very large cost over the long term.

From Monday, August 17, earlier this week, the rise in U.S. Treasury yields accelerated. In particular, the 30-year Treasury yield set a record by exceeding 5.3%, its highest level in 19 years, while the 10-year yield hit its highest since 2025, heightening unease in financial markets.

When the U.S. government issues Treasury bonds, it is borrowing money from the market. Recently, doubts about the government's ability to repay have grown, and Treasury yields have been rising as a result. A rise in yields on newly issued bonds leads to a decline in the prices of existing bonds, affecting the market as a whole.

One of the main drivers of rising U.S. Treasury yields is the rapidly widening fiscal deficit. Issuing Treasuries is essential to cover the deficit, which in turn increases national debt; as of August 19, U.S. government debt had surpassed $40 trillion. Oil price increases tied to the Iran situation have also revived inflation worries, adding upward pressure on yields. In addition, the surge in corporate bond issuance by artificial intelligence (AI)-related companies is contributing to the rise in Treasury yields.

Since Kevin Warsh took office as Fed Chair, the existing practice of forward guidance, which signals to markets how rates will move in the future, has effectively been abolished. Instead, with an emphasis on deciding based on data, the market's ability to predict rates has declined markedly. This uncertainty is acting as upward pressure on yields.

Issuance of corporate bonds by hyperscale companies such as Microsoft, Google, Meta, Oracle, and Amazon is surging. While they account for only 4% of the outstanding balance, their presence has grown so large that they make up 13% of new issuance across the entire market. A steep rise is expected between 2025 and 2026, and issuance is projected to reach up to $300 billion in 2027.

The aggressive corporate bond issuance by hyperscale companies leads to a surge in supply relative to investor demand, pushing corporate bond yields higher. This rise in corporate yields directly translates into upward pressure on Treasury yields. Because corporate and Treasury bonds inevitably compete with each other, the high yields on top-tier private-sector bonds draw in investors and affect the Treasury market as well.

When Treasury yields rise, the valuation burden on stock markets inevitably grows for investors. In particular, a higher discount rate increases the valuation pressure on tech and growth stocks and raises companies' borrowing costs. It also directly hits ordinary households by raising mortgage and auto loan rates, which can shrink overall economic activity.

The U.S. Treasury has expanded its buyback size for 30-year bond yield stabilization from $2 billion to at least $4 billion. However, these buybacks have produced only a temporary drop in yields, and the effect faded within a single day, showing a lack of durability. The Treasury has not specified how many such buybacks it will conduct this year.

The Treasury's buybacks do not reduce the total amount of debt; they merely change the structure of the debt. To keep long-term Treasury yields where they are, refinancing has to be done by buying long-term Treasuries and issuing short-term ones. Through this process, U.S. Treasury debt becomes increasingly filled with short-term bonds.

This shift toward a short-term-heavy debt mix risks a sharp increase in rollover burden. Short-term Treasuries mature quickly and must be repaid or reissued more often, so if market rates rise, interest costs can grow substantially. Ultimately, the short-term rate stability sought today means taking on greater fiscal risk over the long run.

This change in debt structure could further weaken the U.S. government's fiscal health in a future rate-hike cycle. With a high share of short-term debt, if rates rise the government must pay more interest and issue new short-term Treasuries at higher costs, severely constraining fiscal management.

Experts warn that this buyback is largely a stopgap that does not address the underlying problem, and that it could worsen U.S. fiscal health over the long run. Like drinking salt water to relieve immediate thirst only to create greater thirst later, concerns are being raised that it could fuel an even bigger problem down the road.