J.P. Morgan warns: The Treasury Department's plan to double the buyback of government bonds lacks credibility, and long-term yields may face upward pressure again.

JPMorgan's strategists have warned that the market may perceive the U.S. Treasury's unexpected measures to curb long-term financing costs as lacking credibility, which could, over time, raise term premiums and yields. On Wednesday, the U.S. Treasury announced it would at least double the scale of its debt buyback program to provide greater liquidity support, which prompted a decline in long-term U.S. Treasury yields. However, JPMorgan indicated that this move is merely a superficial remedy: the federal budget deficit stands at 6% in an environment close to full employment. In a report authored by strategists including Jay Barry, they wrote, We are concerned that in the absence of genuine fiscal consolidation, the market may perceive this action as lacking credibility, adding, If the Treasury becomes more opportunistic in its debt management approach and diverges further from its principles of conventional and predictable practices, this could lead to higher term premiums and yields over time. The U.S. national debt has surpassed $40 trillion, placing policymakers trying to control financing costs at greater risk, even as Washington continues to issue more and more bonds. In a Markets Pulse survey, about 60% of respondents indicated that the U.S. debt situation is likely to deteriorate until it triggers a major crisis. The impacts extend far beyond the U.S. federal budget, as U.S. Treasury yields serve as a benchmark for global financing costs. Rising yields could transmit to U.S. mortgages and corporate debt, as well as global currencies and sovereign bonds. Before this latest action, the Treasury had made a series of decisions over the past few weeks that reflected growing concerns over rising long-term yieldsby some measures, long-term yields recently reached their highest levels since 2001. The announcement drove the 30-year Treasury yield down 9 basis points to 5.19%, while a long-term Treasury index surged 1.7%, marking the best single-day performance since February 2025. Citigroup has advised clients to purchase 20-year U.S. Treasuries, asserting that this move seems aimed at keeping long-end yields at reasonable levels. Against the backdrop of cooling inflation, Citigroup expects a strong rebound in the bond market over the coming months. Conventional and predictable The sensitivity of the Treasury's latest moves stems from its long-standing adherence to the principles of conventional and predictable practices that do not surprise investors. Treasury Secretary Janet Yellen herself endorsed this approach in a keynote speech at a conference last November. In 2023, the Treasury reintroduced its buyback program, an initiative conceived over two decades ago when the government had a fiscal surplus and sought to repurchase and retire costlier debt. This time, a core objective is to enhance market liquidity, as traders often prefer to hold current benchmark U.S. debt with specific maturities, making trading older Treasuries more difficult and costly. Nonetheless, JPMorgan remarked that the timing of the Treasury's announcement is extraordinarily unusual, occurring just two weeks after the Treasury unveiled the schedule for repurchasing old securities. This move increases the likelihood that if yields continue to rise, the Treasury may reduce the size of long-term auctions. However, the federal government still needs to borrow substantial amounts. JPMorgan anticipates a funding gap exceeding $3.5 trillion over the next several fiscal years, which may necessitate increasing rather than decreasing the supply of long-term bonds. Strategists wrote, While we believe the likelihood of reducing auction sizes has increased, we do not think this will have a lasting effect on lowering long-term yields. We believe todays actions will only provide a temporary impact on long-term yields unless steps are taken to reduce the deficit.