The US Treasury said this afternoon (European time), in a press release, that it will at least double the size of its liquidity support buybacks of long-dated government bonds. In the two long sectors, 10-20 years and 20-30 years, the maximum per operation goes from 2 to at least 4 billion dollars.

The change takes effect on 9 September and runs to the end of the refunding quarter. It follows the 30 July refunding, where the frequency of operations in those same two sectors was already doubled from two to four per quarter, and the quarterly ceiling was lifted from 30 to 38 billion dollars.

Officially this is about market liquidity. But look at the week it arrives in. On Monday the 30-year yield closed at 5.31%, the highest since 2007. The week before, the Treasury had to sell 25 billion dollars of 30-year paper at 5.216%, the highest auction yield since 2001. The 30-year real yield has gone from 2.63% in January to 3.06%. And foreign holdings of Treasuries fell in June, with the UK, China and Japan all selling.

It worked today. The 30-year fell almost 9 basis points to 5.196%, the 10-year 6 basis points to 4.647%, and equities rallied. Scott Bessent got the headline he was after, and I expect he is pleased with himself this evening.

I do not think it lasts, and my reason is a simple one. There is no money to buy the bonds with.

Nothing in the till

There is no cash pile sitting in the US Treasury that can be deployed to support the bond market. Quite the opposite. The federal deficit was 432 billion dollars in July alone, the largest month since March 2021, and interest on the debt has cost around 1.2 trillion dollars so far this fiscal year.

Every dollar spent on a buyback has to be borrowed first. The Treasury sells paper at one end of the curve to buy paper at the other, so, as far as I can see, net demand for US government bonds does not rise by a single dollar. And if the operations are funded with bills, duration comes out of the market, which is an Operation Twist run by the wrong institution. The price of that is a shorter government debt, and a budget that becomes more sensitive to the short rate, at a moment when inflation has run above target for five years.

I would also hold on to the scale here. Two billion extra per operation, against 739 billion dollars of net borrowing in this quarter alone.

Only one institution can create dollars out of thin air

That institution is the Federal Reserve. And I note that the Fed is already at it.

Quantitative tightening ended on 1 December last year, and from 12 December the Fed has been buying Treasury bills. Its holdings sat at 195 billion dollars from April 2024 through to the middle of December 2025. On 12 August this year they stood at 534 billion. That is 338 billion dollars in eight months, and the highest level in the history of the series.

Officially these are reserve management purchases and not monetary policy. The Fed buys short paper for two reasons: to keep bank reserves ample, and to move the portfolio towards the short end of the curve, where issuance already sits. The New York Fed has been explicit about it: these purchases are not a change in the stance of policy, and should not be confused with large-scale asset purchases.

Now follow the dynamic, because this is what worries me.

The Treasury is shifting issuance towards the short end because the long end has become expensive.

The Fed is buying at the short end because reserves must be ample. And in February the Treasury’s own advisory committee discussed something worth pausing on: whether it would be reasonable, in the current environment, to meet part of the central bank’s demand for bills through heavier issuance in that sector.

Every time the Fed buys a bill, reserves are created, which is to say money is created. Ample, in the Fed’s own framework, is a range set by a judgement about rate sensitivity rather than a number, so there is no external limit that says stop. The distinction between reserve management and monetary financing of the deficit becomes a question of intent. You cannot read intent off a balance sheet.

If that is the road we are on, I would expect the dollar to take a beating and inflation expectations to go sharply higher.

Warsh’s test

This is where the Fed has to demonstrate that it is an independent central bank. Kevin Warsh left the Board in 2011, in protest at QE2. He has argued ever since that an oversized balance sheet, whatever its operational justification, puts the central bank in a relationship with the Treasury where politicians can pile up debt without feeling it. He now sits at the head of the table, with a balance sheet growing again and a Treasury Secretary busy propping up the long end.

In my view the test will not be whether he raises or cuts. It will be whether he says no when the Treasury’s issuance choices start to determine what the central bank buys.

The man who thinks he is smarter than the market

And then there is Bessent himself. He has an unfortunate habit of believing he can outsmart the market rather than deal with the thing the market is actually reacting to.

I have watched him do it before. When Moody’s downgraded the United States last year, he called it a lagging indicator. In January he dismissed talk of currency intervention on the grounds that sound fundamentals attract capital on their own.

Six months later he sold euros to buy yen, and told the European Central Bank afterwards. The yen moved 3.2%, half of it came back in August, and US long yields went on to a 19-year high. The intervention held for about a week.

I see the same habit today. The man who thought the market had the dollar wrong now thinks it has the long bond wrong. What he has not done, in either case, is put forward a plan to do something about the fundamental problem – the massive US government budget deficit.

You can push markets around in the short run with liquidity operations, and I have no quarrel with the tactic as such.

But Japan and China have no appetite for US Treasuries. Nor, after the way this administration has behaved for the past eighteen months, is there much left in Europe. The market is not mispricing the long end. It is pricing the fiscal policy it has been shown.

Which brings me to an American president worth listening to on the subject:

“You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”

Abraham Lincoln