Treasury Considers Utilizing Nearly $1 Trillion General Account for Bond Buybacks

According to two senior Treasury officials, the U.S. Treasury Department is contemplating the use of its General Account (TGA), which currently holds close to $1 trillion, to finance its recently expanded government bond buyback program. This potential move could significantly bolster the Treasury's ability to influence long-term bond yields.

The Treasury surprised the market last week by announcing it would double the size of its buyback operations for off-the-run securities in the longer-term debt market, increasing the amount from $2 billion to at least $4 billion. Treasury Secretary Scott Bessent indicated on CNBC that these operations could even exceed this new minimum.

While the Treasury did not specify how these expanded purchases would be funded, market participants generally assumed it would involve the issuance of short-term bills. The officials did not dismiss this possibility. Bessent referred to the operation as a "Treasury Twist" in his CNBC interview, a term typically used for government or Federal Reserve actions where long-term Treasurys are bought using proceeds from short-term debt issuance, implying the sale of short-term bonds.

However, since the announcement, bonds have seen a reversal from their initial rally, leading to higher yields. This reaction is partly attributed to skepticism from many market analysts regarding the effectiveness of the Treasury's plan and concerns about the perceived limitations of its resources.

The utilization of the TGA could reshape this perception. The TGA functions as the government's primary bank account, a reserve held at the Federal Reserve, funded by existing tax revenues. Secretary Bessent has managed to increase the TGA's balance to approximately $950 billion, significantly exceeding the Biden administration's target of $550 billion to $600 billion.

The officials declined to specify the exact amount of the TGA that might be used or when such a decision could be announced. They clarified that there is no indication of using the TGA for purposes beyond the purchase of off-the-run securities, which were the focus of last week's announcement. However, they confirmed that the TGA is considered an available resource.

Treasury Can Manage Without Federal Reserve Assistance

The size of the TGA is managed at the Treasury's discretion. During Janet Yellen's tenure as Treasury Secretary, the stated goal was to maintain a balance equivalent to "a week ahead of cash needs." The current Treasury maintains that its balance is set "consistent with Treasury's long-standing cash balance policy." Should any of the TGA be used and the Bessent Treasury aim to maintain its near-$1 trillion level, additional bonds would need to be issued to replenish the account.

Reducing the TGA's balance, however, would not appear to pose any immediate risks. A lower TGA would mean less readily available cash for the government in the event of a future debt-ceiling standoff. Current projections suggest a new debt limit might not be reached until next winter, or possibly early spring, providing ample time to rebuild the TGA if necessary. In the interim, even a modest use of the TGA, or simply the acknowledgment that the Treasury would deploy it for bond purchases, could influence bond yields.

Furthermore, this approach would alleviate concerns voiced by some bond market participants about the possibility of the Federal Reserve being asked to assist the Treasury in these operations. While the Fed holds the TGA, it does not consider it a component of its monetary policy tools.

The Treasury officials pushed back against criticisms that the department had deviated from its established practice of being "regular and predictable" in bond sales and was attempting to manipulate the market with its surprise announcement. The notification of enhanced buybacks occurred two weeks after the quarterly refunding announcement, a time when such details are typically communicated to the markets.

However, the senior officials asserted that no changes were made to the official auction schedules. They also pointed out that the announcement was made nearly three weeks before the first operation on September 9th, allowing markets sufficient time to prepare. The Treasury also outlined its plans for the entire quarter in its August 19th announcement.

They further noted that it was premature to assess the market's reaction, as the first auction was not scheduled until September 9th.

Secretary Bessent told CNBC last week that the Treasury's objective was to encourage the market to "focus on the fundamentals and not trade the headlines during… a quiet period in a thin market. So we are trying to keep the market in equilibrium."

He expressed optimism about deficit reduction prospects once tariff revenues, following court-mandated refunds, are replaced by new tariffs. He also mentioned that top officials would soon convene to develop strategies for improving the fiscal situation.