RESOLVING THE LEDGER
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The Treasury could use its near $1 trillion General Account to help fund its recently announced plans to increase purchases of government bonds, according to two senior Treasury officials.
Using the TGA would provide the Treasury with considerable firepower to influence long-term bond yields. The Treasury surprised markets last week with an announcement that it would be doubling the size of buybacks of off-the-run securities on the long end from $2 billion to at least $4 billion. Treasury Secretary Scott Bessent said on CNBC such operations could be even larger than the new higher minimum.
However, Treasury made no mention of how it would fund the purchases. Most market participants assumed it would do so by selling short-term bills. The senior Treasury officials did not rule that out. Bessent in the CNBC interview called the operation a "Treasury Twist," a reference to a government or Federal Reserve operation where long-term treasuries are bought and paid for with short-term issuance. That also implied that short-term bonds would be sold.
But since the surprise announcement, bonds have retreated from an initial rally, sending yields higher, in part because of skepticism voiced by many market analysts about how effective the operation would be and whether the Treasury's resources were too limited.
Using the TGA could change that perception. The TGA is essentially the government's checking account, a rainy-day fund of sorts held at the Federal Reserve. It is already funded with existing tax collections. Bessent has built up the TGA to around $950 billion currently, compared with a stated goal under the Biden administration of around $550 to $600 billion.
The officials would not say how much, if any, of the TGA would be used or when such an announcement could be made. There was no implication it could be used beyond the purchase of off-the-run securities that were the focus of last week's announcement.
But they were clear that it is considered to be available.
The TGA's size is discretionary. When Janet Yellen ran the Treasury, officials said the goal was to set the TGA at a "week ahead of cash needs." The current Treasury says it sets the account "consistent with Treasury's long-standing cash balance policy." Assuming any of it is used, and the Bessent Treasury wanted to maintain the near-$1 trillion level, additional bonds would have to be sold to build it back up.
But running it somewhat lower would not appear to entail any immediate risk. Reducing the TGA would mean the government would have less cash on hand in the event of a new debt-ceiling impasse. But the latest estimates are that a new limit won't be hit until the winter of next year and perhaps not until the early spring. That would give time to build it back up if needed. Meanwhile, bond yields could be influenced by even a small use of the TGA or even just the recognition that the Treasury would use it to buy government bonds.
It also would limit any concern, also voiced by some bond market participants, that the Fed could be asked to help the Treasury in such operations. (The Fed holds the TGA like a bank, but does not consider it part of its monetary policy toolkit.)
U.S. 10-year Treasury yield, YTD The Treasury officials pushed back on criticism that the Treasury, in its surprise announcement, had abandoned its long-standing practice of being "regular and predictable" about bond sales and that it was gaming the market. The announcement of the enhanced buybacks came two weeks after the quarterly refunding announcement, when such information would normally be relayed to markets.
But the senior officials said that no change had been made to the actual official auction schedules. They added that the announcement was made nearly three weeks before the first operation will take place on Sept. 9, giving markets time to prepare. The Treasury also announced the plan for the entire quarter in its Aug. 19 announcement.
They added that since the first auction is not scheduled until Sept. 9, it was too early to judge the market impact.
Bessent told CNBC last week that the Treasury's intent was to get 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 said that he expected progress in the deficit when tariff revenue returns after court-mandated refunds are replaced by new tariffs. And he said that top officials would be meeting soon to forge plans that would improve the fiscal situation.
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