Washington’s trillion dollar move should worry investors

When a government has to step into the market and start buying back its own debt, it is not a display of strength. It’s an admission.

Scott Bessent’s US Treasury doubled the size of its bond buyback programme this week. Reports now suggest officials are considering drawing close to $1 trillion from the Treasury General Account to help fund it.

Washington will call this prudent debt management. I call it a warning light on the dashboard of the world’s most important bond market.

The US national debt has just punched through $40 trillion, roughly two years ahead of official government forecasts. 30 year yields had climbed to levels not seen since 2007 before this intervention landed.

Pension funds, foreign central banks and the long only institutional money that has absorbed American debt for decades simply did not show up in the volume Washington needed. So, officials reached for another lever.

It is, in my view, a stopgap, not a solution. It smooths the surface of the market without touching the pressure building underneath it.

Buybacks can quiet a single trading session, and that is exactly what happened this week. Yields fell sharply within minutes of the announcement. For a few hours, it looked as though the fire had been put out.

It had not, I don’t believe. A borrowing position that has just crossed $40 trillion cannot be talked down or bought down in an afternoon, and investors reached that conclusion almost as fast as the announcement itself moved through the wires.

The rally reversed within a day, erasing the initial drop in yields entirely.

It is a textbook pattern, a market testing an intervention and finding it wanting once the shock wears off. The first reaction was reflex. What followed a day later was the market doing its arithmetic, and arriving at a far less comfortable answer.

This account holds cash built from ordinary tax receipts, money meant to fund government operations, not prop up the government’s own bond auctions. Washington is dipping into its own operating reserves to manufacture demand for its own paper.

This is, it could be argued, is the behaviour of a borrower running short of easy options.

Governments have leaned on financial engineering before to buy themselves breathing room. The scale here sets it apart. A trillion dollars is not a rounding error on any balance sheet, and pulling that sum from an operating account to defend a bond market is the kind of move that gets studied in hindsight as an early signal, not a footnote.

Investors should not panic, but they do need to consider repositioning. Anyone holding a portfolio heavily weighted toward long duration government debt in a single currency needs to ask, honestly, how confident they are that this debt will hold its value over the next decade.

Spreading exposure across regions, currencies and asset classes has stopped being a nice to have. It is now essential. Investors should be looking well beyond biases, toward equities, alternative assets and currencies that are not tethered to a single sovereign balance sheet under this kind of strain.

It would appear that Washington is buying time, not fixing the problem. Investors who treat this episode as a passing headline rather than a structural warning will be the ones most exposed if or when when the next, larger test of confidence arrives.