The Treasury Department’s plan to expand purchases of long-dated government debt is beginning to show signs of improving liquidity in the bond market without preventing yields from responding to economic conditions—even though the actual purchases will not begin for weeks.
Since Treasury Secretary Scott Bessent announced last week that the department would at least double the size of its buybacks of longer-dated securities, Treasury bonds have outperformed interest-rate swaps of comparable maturities. The gap between the 30-year Treasury yield and the equivalent swap rate has narrowed to its smallest since February. Bloomberg News first reported the narrowing gap.
That movement suggests the purchases are reducing the additional yield investors demand to own and trade Treasury securities, rather than imposing an official ceiling on long-term interest rates.
Interest-rate swaps allow investors to gain exposure to fixed or floating rates without owning government bonds. Comparing swap rates with Treasury yields can therefore help distinguish changes in the general price of long-term interest-rate risk from changes caused by conditions specific to the Treasury market.
Those Treasury-specific factors include the availability of particular securities, dealer balance-sheet capacity and the relative difficulty of financing or selling older bonds. When Treasuries outperform swaps, it can indicate that investors are demanding less compensation for those market frictions.
A Bank of America analysis released Wednesday similarly concluded that the effects of Treasury’s policy are likely to be more reliable in relative-value measures than in outright yields. The bank’s rates strategists said the clearer way to position for the expanded purchases was through a narrowing of the 30-year swap spread rather than a broad bet that long-term rates would fall.
Bank of America estimated that the announced expansion could eventually provide around six basis points of support to the 10-year yield if maintained through the end of 2028. The estimated effect through the end of this year was only around one basis point.
The operations are primarily directed at older, less frequently traded securities known as off-the-run bonds. By providing investors and dealers with a regular outlet for those securities, the buybacks can reduce market fragmentation, release dealer balance-sheet capacity and improve trading across the Treasury market.
The program differs substantially from yield-curve control, under which a government or central bank commits to defending a particular interest rate by purchasing whatever quantity of securities is necessary. Treasury has announced no yield ceiling and has made no unlimited commitment to buy bonds.
Long-term yields have also continued moving in response to inflation data, oil prices, economic reports and expectations for Federal Reserve policy. The 30-year yield fell following Treasury’s announcement, subsequently rebounded close to its previous level, and then declined again. It remained near 5.2 percent Wednesday.
That movement indicates the market remains free to determine the underlying level of long-term rates. At the same time, the persistent improvement in Treasuries relative to swaps suggests the purchases are reducing some of the liquidity premium embedded in government bonds.
The government’s financing requirements have not declined. Treasury continues to sell new securities even as it retires older bonds through the buybacks. The operations effectively exchange a fragmented collection of older debt for larger and more liquid benchmark issues.
The emerging market evidence therefore points to a modest improvement in the functioning of the Treasury market. Long-term rates are still being set by economic and financial conditions, while investors appear to be demanding somewhat less compensation for the difficulties associated with holding and trading Treasury securities themselves.
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