Since Bessent announced last week that Treasury buybacks of long-dated debt would be at least doubled, market sentiment has shifted noticeably.
The clearest signal has come from swap spreads. Thirty-year Treasuries have begun outperforming comparable interest-rate swaps, pushing the spread between the two to its lowest level since February. Because swaps are often used as an alternative to holding cash Treasuries, the narrowing spread points to stronger demand for government bonds.
Jason Williams, Citi’s head of U.S. rates strategy, described the Treasury’s intervention as creating a “quasi-option” for long-duration Treasury holders—essentially a potential policy backstop if long-term yields rise too sharply.
Traders Now Fear Yields Falling Too Fast
The change in market psychology is also visible in options. Alex Manzara of R.J. O’Brien said investors’ concern has shifted from simply worrying about higher yields to the possibility that aggressive intervention could trigger a sharp decline in long-term yields.
That has encouraged traders to build bullish positions in Treasury futures options, while long-end bonds have seen significant short covering and defensive repositioning.
ING strategist Padhraic Garvey said the narrowing spreads suggest investors increasingly believe the Treasury could expand buybacks repeatedly if policymakers deem it necessary.
Fiscal Pressure Has Not Disappeared
Still, the rally faces a fundamental obstacle: America’s enormous fiscal deficit.
Ten-year Treasury yields were around 4.64% during Asian trading on Wednesday, remaining elevated despite retreating from the recent high. PIMCO’s Libby Cantrill warned that technical intervention may suppress yields temporarily, but it cannot eliminate the huge supply of government debt needed to finance persistent deficits.
JPMorgan’s August 24 client survey also showed positioning becoming more polarized, with neutral positions falling to 54%, the lowest since May.
The message is clear. Bessent may have created a temporary policy floor under long-term Treasuries, but whether that support can overcome America’s underlying fiscal pressures remains the bigger question.
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