The Government's Checking Account Is Now a Market Tool

SUMMARY

Joe Brown, a former stock broker and financial educator, analyzes recent interventions by Treasury Secretary Scott Bessent in response to surging long-term Treasury yields. The discussion focuses on the use of the Treasury General Account as a tool for bond buybacks, the dynamics of government debt management, and the structural challenges facing the US bond market.

MAIN POINTS

• Long-term Treasury yields briefly fell after buyback announcements but quickly rebounded, highlighting the 10-year as the key benchmark for US borrowing. [1:00]
• The Treasury General Account, now held at the Federal Reserve, has seen increased usage and volatility since the Great Financial Crisis, serving as the government's operational checking account. [6:00]
• The Treasury General Account cannot provide a long-term solution to rising yields, as persistent deficits require continual borrowing to maintain its balance. [9:01]
• Money market funds, which primarily hold short-term T-bills, have reached record levels, ensuring ongoing demand for short-term debt while long-term debt faces weak demand. [13:00]
• Current Treasury actions set a ceiling on long-term yields but do not lower them, and only a major buyer—potentially banks if regulations change—could meaningfully reduce long-term rates. [16:02]
• Future options include relaxing bank regulations or implementing large-scale yield curve control, both of which could have significant market and inflationary consequences. [18:01]

DETAILED ANALYSIS

Recent volatility in the US Treasury market has underscored the limitations of verbal and operational interventions by policymakers. When Treasury Secretary Scott Bessent announced a doubling of long-term bond buybacks, yields on 10-, 20-, and 30-year Treasuries initially dropped but quickly returned to previous highs. The 10-year Treasury remains the benchmark for most US borrowing, influencing rates for mortgages, auto loans, and business loans.

Its status as the risk-free rate is rooted in the government's ability to enforce repayment, but persistent yield increases signal underlying stress in the market.

To address rising yields, Bessent proposed tapping nearly a trillion dollars from the Treasury General Account (TGA) to fund buybacks. A buyback involves issuing new, typically shorter-term debt to repay existing longer-term obligations. This approach is akin to refinancing a mortgage with a credit card—shifting, rather than reducing, the debt burden.

The TGA, essentially the government's checking account, has evolved since the Great Financial Crisis. Previously held within the banking system, it was moved to the Federal Reserve to manage the effects of quantitative easing and to prevent excess reserves from destabilizing bank balance sheets. Since 2015, the TGA's balance has become more volatile, reflecting political gridlock and the need for a fiscal buffer during government shutdowns or budget impasses.

The massive spike in the TGA during 2020 was driven by pandemic-related borrowing and stimulus, with funds temporarily accumulating before being rapidly spent. Today, the Treasury aims to maintain a balance around one trillion dollars to ensure operational continuity, but this is not a sustainable strategy for yield suppression. Persistent federal deficits—currently running at nearly $2 trillion annually—mean that any drawdown of the TGA must eventually be replenished through further borrowing, not increased tax revenue.

The mechanics of bond yields are also central to the discussion. Bond prices and yields move inversely; when the government or other buyers purchase bonds, prices rise and yields fall. However, the current lack of demand for long-term Treasuries contrasts with robust demand for short-term debt, as evidenced by record levels—over $8 trillion—in money market funds.

These funds, which hold T-bills, offer liquidity and moderate returns without the inflation risk associated with longer maturities. The automatic rollover of maturing T-bills ensures ongoing demand at the short end, while the long end remains vulnerable.

Bessent's interventions have effectively drawn a line in the sand, capping long-term yields but failing to push them lower. This creates perverse incentives for large holders of long-term Treasuries, who can sell without fear of further price declines. For yields to fall meaningfully, a substantial new buyer must emerge.

Historically, foreign central banks and the Federal Reserve filled this role, but both are currently sidelined. The only plausible candidate is the US banking sector, which is currently constrained by the supplementary leverage ratio (SLR) regulation. Removing or relaxing this rule could unleash significant bank demand for Treasuries, but such a move carries risks.

Alternatively, the government could resort to full-scale yield curve control, reminiscent of the 1940s, with the Fed massively expanding its balance sheet—an action likely to trigger higher inflation.

In summary, the use of the Treasury General Account as a market tool is a short-term measure that does not address the structural challenges of persistent deficits and weak long-term debt demand. Sustainable solutions would require either regulatory changes to enable new buyers or a return to aggressive central bank intervention, both of which have far-reaching implications for financial markets and the broader economy.

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