The Real Reason The Treasury is Buying Back So Much Debt

The US government is currently doing something called treasury buybacks and the rate at which it is buying back its own treasuries is accelerating to the point where already year to date it has already bought back more treasuries than it did during the entire year in 2024. And because of this, some people are absolutely losing their minds about this. So the question is, what exactly is happening with these treasury buybacks and is it a big deal? Is it something we should be concerned about? Something that might impact the markets? OK, so the first thing that we need to make abundantly clear here is there is a big difference between the Federal Reserve and the US Treasury. The Federal Reserve, run by Jerome Powell, they set interest rates and they do QE or QT. They have a balance sheet full of assets. They buy or sell. They create money. They regulate banks. That's the Federal Reserve. When the Federal Reserve purchases assets like treasuries from the open market, they're printing money to do so. This is a chart of their balance sheet. You can see when it goes up, that means they are printing money to buy assets. Their balance sheet has been declining for a couple of years now, which means as that debt gets paid off to them, those dollars cease to exist. That's the Federal Reserve. We talk about them all the time. And treasury buybacks have nothing to do with the Fed. So forget about the Fed. Now let's look at the Treasury. The Treasury is run by Scott Besant. The Treasury is the financial center, the hub for the US government. So when the US government takes money from your paycheck in taxes, it goes to the Treasury. When the US government spends money on a military contractor or on a social security check or on a politician's paycheck, that is coming from the Treasury. The Treasury is the operation of money, of finance for the US government. Congress tells them what to do. Treasury is under the executive branch and they actually go and do what Congress says they need to do. This is a chart of the Treasury general account. You can think of this like the US government's general checking account. When they take money from taxes or when they borrow, all the money goes into this account. When they spend money, all the money goes out of this account. Treasury buybacks are specifically something that is being done by the Treasury itself. The Treasury department, hold that off to the side because what we're talking about here is all being done by the Treasury department. The next thing that we need to make clear is that there are bonds called Treasuries. When the US government borrows money, they do so by issuing debt or selling a bond. And because it's done by the US Treasury, we call them Treasury bonds. The yield on the current 10-year US Treasury bond right now is 4.1%. The 30-year Treasury bond is 4.8%. Now you're probably thinking, well, what is the difference between a Treasury bond and a Treasury note and a Treasury bill? The answer is how long that debt will exist before it gets paid off. Treasury bills are short-term debt that will get paid back anywhere from four weeks to 52 weeks away from the time that it is issued. If you see the word mature, that means paid back. So a T-bill, Treasury bill will mature within one month to one year. A Treasury note is government debt that will mature or get paid off within two to 10 years. And Treasury bonds have maturities of either 30 or 20 years. Now a government will issue debt, it will borrow money when it wants to spend more than it can take in taxes. The difference between the money it takes from citizens in taxes and the money it wants to spend is called the deficit, the budget deficit. So far year to date, the budget deficit is $1.6 trillion, which is 7% higher than it was same time last year. In other words, the United States has taken a bunch of money from us in taxes, spent it all, and then it has borrowed an additional $1.6 trillion for the rest of its spending. So far. And that's just this year. Now, the process that the U.S. government goes through in order to borrow money is an auction. It will go to the open market and it'll say, hey, we want to borrow money for one year or five years or 10 years or 20 years or 30 years. And we want to pay a specific interest rate. And usually players show up. Banks, financial institutions, even individuals can say, yep, I would like to participate and lend you money for that length of time. Now, if I as an individual show up to this auction and I say, yep, I want to loan the U.S. government money for 10 years. In other words, I purchase a bond. I actually do not have to hold on to that until maturity. I don't have to hold on to it for the full 10 years. Let's say a couple of months go by and I realize, you know what? I'd really like that money back. I can sell that 10 year treasury to somebody else. If during that time interest rates have gone down, then that means that the price of my treasury will have gone up because prices and yields are inversely tied because the end of the day, the government is going to pay back the principal plus the interest. The amount they're paying back is not going to change. But if interest rates have gone down between the time I bought the bond and the time I want to sell it, then in order for me to get market value for that debt, I can charge a higher price for that debt that I want to sell because rates on new debt have gone down. The debt that I hold has a higher interest rate, which means I can charge a higher price for it to get my market value. U.S. treasury debt historically is very liquid. In other words, there's always buyers and sellers of treasuries. And so if you want the government to owe you money, you don't actually have to show up to the auction and get that bond when it's brand new. You can just buy a treasury from somebody else who's selling it. And later on, if you want to sell it, you can you're going to take on some interest rate risk. If interest rates move up after you buy it and you need to sell it later, you're going to have to sell it for a lower price. And right now, the U.S. government is doing something that historically it really does not do that much of. It is doing something called treasury buybacks, which means if you go to sell a treasury today, there's a good chance, a decent chance that you're actually selling it to the government themselves. The treasury itself is buying back some of its debt from the market. Now, functionally speaking, there is zero difference between a treasury buyback and paying off debt early. That specific bond that they are purchasing back gets retired. It gets eliminated, not going from one person in the economy to another person in the economy. It's going back to the U.S. government. They owe that to themselves. It gets wiped out. So it'd be the same thing as you just paying off a credit card early or a car loan early or a mortgage early. A treasury buyback is simply the U.S. government paying off one of its debt instruments before maturity. But there's a problem with this. The problem is that the U.S. government is running a perpetual deficit this year to date alone, one point six trillion dollars, which means it's not using income to pay off any of its debt early. It is borrowing to pay off debt early. This would be the exact same thing as you using a credit card to pay off your mortgage early. You're using short term debt to pay off long term debt. You might pay off a hundred grand worth of debt, but now you have a hundred grand worth of new debt because you had to borrow more money in order to pay off money that you And that's exactly what treasury buybacks are doing because U.S. government is not running a surplus. It must borrow in order to pay off other debt. Early treasury buybacks are financed by more treasuries, which means the net effect on the financial system itself on the economy itself is zero. One U.S. treasury in existence is replaced with another U.S. treasury in existence. Borrowing from Peter to pay Paul. There is no net effect on the economy, on the financial system whatsoever. So the question is, why is the U.S. government even doing this? And not only why are they doing it, why are they doing it more and more to the point where they've done about one hundred thirty eight billion dollars worth of buybacks this year? Whereas in twenty twenty four, it was only about 80 billion dollars total for the whole year. And even that was a new thing. Before that, they rarely did buybacks. In fact, you can see from 2003 to 2013, there were absolutely zero buybacks whatsoever. You can go on the Treasury's website and you can see the planned buybacks. They are scheduled and you can see they will continue to do more and more of these throughout the rest of the year. Now, I want you to focus on this middle column here, which says operation type. And it says liquidity support. That's important. That provides a hint as to why they are doing this. Before I touch on that, though, I need to make a comment about what I said earlier, which is if you were doing this, it would be like using a credit card to pay off your mortgage, short term debt to pay off long term debt. Is that what the U.S. government is doing right now? The answer is yes. The Treasuries that they are buying back and retiring are ten, twenty, thirty year, primarily Treasury bonds. You can see some of them are short of maturity, like these are one year to ten year tips. These ones are one month to two year bills. But here's twenty or thirty year bonds, five to seven year, ten to twenty year, twenty to thirty year, ten to twenty year, three to five year, twenty to thirty year, ten to twenty year, seven, ten year, twenty to thirty year, ten to twenty year and ten to thirty year. So they are largely paying back, buying back, retiring the longer term debt that won't mature for years, potentially sometimes decades from now. But they are borrowing at the short end of the curve. They're using T-bills for most of their borrowing right now. In fact, over the last six months or so, both Scott Besant, the Treasury secretary and Trump have said, if we need to, we'll basically issue all debt in T-bills right now. So they're borrowing extremely short term debt in order to pay back some of that longer term debt. This is shifting the entire weighted average maturity of U.S. national debt down to the short end, which means the longer this goes on, the faster that debt is going to be rolling over. OK, so now let's get into the why. There are a few reasons why they are doing this. Number one, interest rates on T-bills are much lower right now. You look at the six month right now, it's down at three point nine six percent. One year is at three point seven percent, whereas the 10 is higher at four point one. The 20 years at four point seven nine and the 30 years at four point eight four. And so as they are rolling over this debt right now, they are replacing more expensive debt with cheaper debt. Now, keep in mind, none of this is actually significant year to date. It's about one hundred eighty four billion dollars. Last year they did about 70 billion dollars on thirty seven trillion dollars worth of the national debt. Even if they were to 10x the amount of treasury buybacks they were doing, it would still make a very small dent in the overall debt that they hold. And so while they are paying off, buying back some of those treasuries that are longer term with a higher interest rate and replacing them with treasury bills that will mature sooner and right now have a lower interest rate, this isn't going to have any noticeable difference on the budget whatsoever. This is a drop in the bucket. And so lowering the cost of the debt overall is definitely not the primary reason for doing these buybacks. Which brings us to the second reason, and that is the fact that the odds of a rate cut by the Federal Reserve at the next meeting are at currently at ninety nine point four percent. In other words, the market is basically expecting a for sure certainty that the Federal Reserve is going to be cutting rates. Now, for those of you who aren't aware, the Federal Reserve controls only one interest rate. That's the overnight rate, the federal funds rate. They don't control outright things like mortgage rates, auto loans, credit card rates. They don't even control treasury interest rates. They control the overnight rate that banks lend to each other at. And when they push that interest rate lower, it has an influence on the rest of debt in the economy. But it doesn't outright control it, which means the closer debt exists to that overnight rate, the more it will be influenced by the Fed's rate cuts. This means that the 30 year treasury will be influenced a lot less by the Fed cutting rates than six month T-bills because six month T-bills are a lot more closely tied and interchangeable for things that banks do associated with the federal funds rate. So as the Fed cuts rates, things like T-bill rates will go down. Things like your high yield savings account rates will go down, but the Fed cutting rates will not influence things like mortgages or 30 year treasuries nearly as much. And so in expectation of the Federal Reserve cutting rates, the U.S. government is slowly pulling some of that debt to the short end so that it can be rolled over at those lower rates. Going back to the personal analogy, it'd be like paying off some of your mortgage. Let's say you're paying 7% on your mortgage and you're doing that with a credit card because you know in the mail in a couple of months you're going to get a 0% introductory rate that you can do a balance transfer with. So you need all that debt on your credit card so you can take advantage of the lower rates. Again, though, like I pointed out earlier, the U.S. government owes $37 trillion. So even this is not the primary reason. We have to go back to what it says on the schedule for upcoming buybacks, which is liquidity support. The fact of the matter is there is a lot less demand for long term U.S. treasuries today than there used to be. Auctions for 10, 20, 30 year government bonds are not going as well as they used to 10, 20, 30 years ago. The U.S. Treasury is not performing as well as the bedrock of the global financial system as it used to. When the U.S. government tries to borrow significant amounts of money at its auctions for 10, 20, 30 year treasuries, fewer and fewer players show up. This means that when they do borrow at the long end of the curve, they end up having to pay higher and higher interest rates than they want to. But there is currently still a ton of demand for short term debt like T-bills. Number one, there is very little inflation risk with short term debt. I don't know what inflation is going to be over the next 10, 20, 30 years. I expect it will be high, but I'm reasonably certain that it's not going to be insane over the next six months, especially if I'm a bank or a financial institution. So I'm much more likely to put my money into T-bills when I know I'm going to get it back. I don't have the inflation risk. I don't have to worry about selling it later on in two years or three years at a huge discount just in case rates move the wrong way. So T-bills are highly liquid and there's high demand for them, which means there's a lot of money in the financial system willing to be lent to the U.S. government as long as it's for short term debt like T-bills. But that does not exist anymore today, at least not to the extent that it used to for long term debt, which means that in order to make sure that the long term debt, those 10, 20, 30 year government bonds, those treasuries still trade with enough liquidity where big players want to dump a bunch of treasuries at once. Other players want to buy them to make sure that nobody gets scared out of that market because they don't know if they'll be able to sell it. The U.S. government is providing liquidity support. Making sure that other players still trust that it is a liquid financial instrument. And that is the primary reason why the U.S. government is doing treasury buybacks and why the amount of treasury buybacks they are doing is increasing. It'd be similar to Apple wanting to make sure that the price of used iPhones doesn't dip too drastically. And so anytime used iPhones get below a certain price, they step in and they buy up the used iPhones, making sure that the market is aware. All right, I can hold on to these used iPhones. I don't have to be worried about the price plummeting super quickly because if it does dip too much, then Apple will just buy them back. It's an attempt to instill confidence in the liquidity and the safety of holding treasuries. Now, the real question is, if you have to manufacture demand like this to buy back your own debt by borrowing other debt from other people, how trustworthy is this debt? Really? How liquid is it really? And how long can they keep this game going? And while that is a scary question, potentially, I think the answer is longer than most people think. If you want more insights like this, especially about topics that I don't talk about on YouTube, I've got a free newsletter. If you didn't know about it already, all you got to do is click on the link in the description below, sign up with your email address, and I'll see you in your inbox every week. As always, thanks so much for watching. Have a great day.