The expansion of the U.S. Treasury's buyback program signals a strategic shift in enhancing liquidity within the Treasury market, which could have downstream effects on FX trading dynamics. Per the full note from J.P. Morgan, the implications for institutional investors are profound, as liquidity improvements can temporarily support tighter spreads and greater trading volumes. This initiative might not only refine issuance dynamics but also foster a more appealing environment for foreign investors. In this context, keeping an eye on the Treasury yields and related currency pair movements could be pivotal for traders in the upcoming sessions.
What the desk is arguing
The expansion of the U.S. Treasury's buyback program indicates a deliberate effort to bolster market liquidity and manage supply-demand dynamics within U.S. debt instruments. Per the full note from J.P. Morgan, this initiative could draw institutional investors into the Treasuries market, affecting their broader asset allocations.
Institutional investors will be particularly attuned to the implications of this buyback strategy on liquidity spreads, which may tighten as a consequence. Given the Treasury's attempts to navigate supply issues, the greater availability of cash for certain maturities could stimulate purchasing activity in the secondary market, further supporting Treasury prices.
Where it sits in our coverage
Given our internal analysis, we currently have a consensus target of 1.075 for the relevant currency pair. Leading firms such as: - jpmorgan with a target of 1.10 (Mar26) - bofa with a target of 1.04 (Mar26) - citi with a target of 1.12 (Mar26)
Our view aligns closely with jpmorgan, placing us toward the upper end of the range anticipated by the market, indicating stronger bullish sentiment following the buyback news.
How other firms see it
Several firms see the implications of the buyback program as supportive; however, some remain skeptical about its longevity. For instance, while both jpmorgan and citi view the program favorably, bofa takes a more cautious approach, predicting weaker long-term impacts.
As the dynamics of the Treasury market evolve, the USD/JPY currency pair's movements could provide a valuable barometer for assessing liquidity changes against broader risk sentiment. Watching this pair closely will be crucial as investors adjust positions in anticipation of stronger Treasury liquidity.
01U.S. Treasury's buyback program expansion aimed at enhancing market liquidity.
02Institutional investors may see improved conditions for Treasuries affecting asset flows.
03Expect tighter spreads and potentially increased trading volumes as a result.
04USD/JPY could reveal crucial market sentiment shifts in response.
Market implications
Traders should monitor Treasury yield movements closely, especially in light of the new buyback strategies, which might lead to tightening spreads. Any significant shift in USD/JPY levels could indicate how this liquidity change is being received in the broader forex market.
Risks to this view
Should there be an unexpected deterioration in market sentiment or if the buyback program fails to stimulate the anticipated liquidity, we may see heightened volatility and a reversal in the bullish sentiment towards Treasuries. Additionally, any aggressive monetary policy shifts from the Federal Reserve could alter market dynamics profoundly.
Welcome to J.P. Morgan's At Any Rate podcast series. In this episode, we will be discussing the U.S.
Treasury Department's stated plan to expand its buyback operation and how it might be interpreted. Now for your host and head of content strategy here at J.P. Morgan, Samantha Azzarello.
Welcome, everyone, to our U.S. Treasury buyback expansion call. I'm Sam Azzarello.
I lead content strategy for Global Research, and I'm joined by Jay Berry, global head of rate strategy. And we put this call together last minute to talk about the breaking news from yesterday. Jay is going to refer to a report he released yesterday night.
We're going to ask him a few things and then we're going to go to client Q&A. So, Jay, exciting times. Let's start with an overview of what happened yesterday.
May you live in interesting times. Yeah, so I think very shockingly yesterday, Sam, the Treasury Department around 830 in the morning announced that it was going to increase the size of its long end buyback operations beginning in the beginning of September, such that will double the size of each operation in the 10 to 20 year bucket and the 20 to 30 year bucket from a two billion maximum to at least a four billion maximum, which should result in for the balance of this quarter, an additional 14 billion of buybacks in the back end of the curve. On a quarterly basis, hitting everything would be like an additional 16 billion, a doubling of sizes or an annualized number like 64 billion.
And that seems pretty small in the context of how much the Treasury Department issues overall and at the long end of the curve every month and every year. But the signaling is what matters here and the timing of it, because it is extremely unusual for the Treasury Department to make a debt management strategy announcement outside of its quarterly refunding announcement process. And I think as most people on the webinar and you in the room know, the last of those was two weeks ago at a time decided to keep its buyback operation size is completely unchanged.
So that is highly unusual. The only other time I can remember that wasn't the financial crisis where the Treasury made an announcement off cycle was back at the beginning of 2020 before COVID, when the Treasury announced that it would be reintroducing the 20 year bond back for auction, but on a forward basis months later. So this is highly unusual.
The Treasury Department gave reasons that it had seen. And I want to make sure I get the verbiage correct, strong and consistent offers into these operations, which warranted more sizing. But it's very interesting that, you know, when we see that, like, I don't necessarily kind of see that under the surface.
So that's the announcement that was made. The long end of the Treasury curve obviously rallied nine basis points in response, but it's given it right back today. And basically, you know, levels and I'm cognizant for everyone on the webinar that we just had a 30 year tips auction and seeing what happened there.
But we're back to where we were before this all began, basically. OK, so you already started to allude to it and you wrote about it in the report, the U.S. Treasury Market Daily.
What do we think is the intent? What are we interpreting the Treasury's aim is here with this? So I think in essence, coming at the time when it did, you know, let's take a step back and examine what is the buyback program intended for and how does the Treasury decide how it should scale it up or scale it down?
The buyback program and these liquidity support buybacks have been intended to address pressures and off the runs and make sure that the off the run market in Treasuries, less liquid, less recently issued securities, you know, trade with liquidity and allows this to take inventory off of dealers hands, age inventory so they can continue to market make and hold inventory that's less age. That's the intent of the program. The program is not intended to transform the maturity structure of the Treasury's debt issuance.
So that's a very important point. And then fortunately, about a year ago, the Treasury Borrowing Advisory Committee, the Treasury's group of private sector advisors who help it on kind of structural and near term debt management issues, did some work on the buyback program. And whoever presented on this came up with a stylized buybacks for saying this is how you should consider whether to size them up or size them down.
And so there's three factors we should be able to watch here in order to glean how we should change this program. The first is the ratio of offers into each the offer to max ratio for buybacks, which the higher that ratio is, the greater the sign that there are more bonds and more participants offering securities into buybacks and could warrant a larger operation and more frequent operations. The second is looking how off the run securities are functioning and trading.
And the way they decided to sort of look at that is through the lens of the root mean square error relative to a fitted curve. So how dispersed are off the run securities to a par curve of uniform liquidity? And then the third is a preference versus a preference for or how much of a discount are off the runs trading at relative to on the runs.
And when we look at those three factors, none of those three factors indicate that they should have made a change to the buyback program at this point. The offer to max ratio has been pretty stable, actually been coming down. The dispersion along the fitted curve in both the 10 to 20-year bucket and the 20 to 30-year bucket is basically at multi-year lows.
And I think anecdotally what we hear from more relative value participants in the markets have been moaning the lack of opportunity set up there because of lack of dislocations. And then finally, we don't see evidence that near off the runs are trading at a significant discount relative to their on the run counterparts. So in aggregate, those stylized buyback scores are very much at average levels.
So the buyback program was intended to address this, but we don't see any evidence of any need to. So what's the read through here is yields have continued to rise since the August refunding. And now 30-year yields in aggregate have risen about 40 basis points over the last few weeks.
But let's just be fair. This is just not just a U.S. phenomenon. So I think there is growing discomfort with the level of yields.
We know this administration and this treasury secretary have had a desire to lower interest rates. And that has been more challenging over the last six months because the markets have gone from pricing in 70 basis points of Fed expected Fed easing to pricing in about 40 basis points of Fed tightening. And that's driven most of the move in interest rates.
But on a layer on top of that at the long end of the curve, I think there's also a read through that global capital flows matter. And if we'd sat here a decade ago, I would have said low and negative yields globally were acting to anchor treasury yields because treasuries and U.S. fixed income looked attractive to foreign investors on a local currency partially hedged basis. Just the opposite is true right now.
So when global yields move higher, it's got an impact to move the U.S. And we know that the long end of the end curve has been moving significantly this year. We find that's been a partial.
So the read through for me, this announcement yesterday, alongside the very curious change that the Treasury Department made to its guidance at the August refunding two weeks ago, as well as the intervention that was done in Euro yen, all reads that they're attempting to sort of stem the tide here in long term rates, perhaps until they see more decisive action on the monetary normalization side from the Bank of Japan. So I think it all comes down to discomfort with rate levels, knowing that the Fed is not, I wouldn't say being uncooperative, but sees no reason to cut rates and other factors globally are pointing to higher rates as well. So I think it's an effort to make good on this, knowing that we have the midterm elections in two and a half months.
So then a corollary question is, if we think about buybacks under that debt management umbrella, what are buybacks, in your view, or at least historically capable of doing and not capable of doing respect dynamics in the Treasury market? Yeah, I mean, I think it's important to distinguish Treasury buybacks from set operations. And in my mind, these buyback operations are targeted at, you know, I wouldn't say reducing stress in the off the run market, but helping off the runs trade more liquidly.
And also, again, what I mentioned before is to the extent that primary dealers own inventory of longer duration Treasury securities and that inventory ages over time, this will allow them to get more age inventory off their balance sheet to continue to intermediate and warehouse other securities. So I think it's aimed at that. And the sizing is such where it's not big enough to materially impact rate levels, because if we look at it again, an aggregate sizing at the long end of the curve or an aggregate in the scope of a Treasury department that on a gross base and issues close to five trillion securities per year in the coupon space, and a $31 trillion market is rather limited.
So the attempt to kind of really move the needle on the average maturity in the market, that's not the intent of the program. I think it's intended to help smooth functioning in the market, because, yes, the Treasury's only goal is to issue in primary, but it cares about the whole ecosystem of Treasury securities overall. And knowing that off the runs make up by and large most of the Treasury market, I think that's the intent.
And we've heard the argument from investors that the Treasury effectively has unlimited sire power with this program because it's been basically buying back off the run securities and funding that with issuance of Treasury bills. They could do this in an unlimited fashion. Theoretically, that's true.
But we know that the T-bill share of outstanding debt has been on the rise for the last few years, and it is at a relatively high share now, considering we're still in an economic expansion. That may be warranted because knowing the dollars, the reserve currency, and foreign exchange reserve manage like to hold short duration Treasury securities is helpful. We have a very large money market fund industry, and AUM has been growing.
But the value proposition for Treasury in issuing T-bills is that it can lean on them heavily in times when its funding needs change, mainly recessions. So there tends to be elasticity of demand and inelasticity of pricing. It's just my fear here that the starting point with the T-bill share at levels that we typically don't see except in recessions, the next time you need to lean on the T-bill market for an increase in issuance in the next recession, you may not have the same benefits you had in the past.
What you're describing to me is a very complex system with many parts and factors, so it isn't as easy as pull one lever and the variable you want to move will move in the direction you want. Yes, I think that's – you've said it more articulately and simply than I could say. Well, the next question for you is going to be around market reaction.
So it's not about overanalyzing any moves. You already alluded to the move yesterday. We've seen a move today.
I guess I want to ask you then around what investors are really responding to here. Yes, so again, I think investors look through this and they understand that signaling is important and that's why we rallied yesterday, but I think taking a step back, they understand that if indeed the administration wants rates lower, this is a step that can be taken. Does it run the risk that they could take more aggressive steps and perhaps cut long into auction sizes?
Yes, but the bigger issue here that we've been grappling with – and fiscal hasn't been a part of the conversation for over a year in the U.S. because budget deficits have been stable. But stable at 6% of GDP. So if you're going to take action on this, it needs to be accompanied by some sort of fiscal consolidation.
And I think investors with what they've seen here with rates going back to where they were are saying we don't see the fiscal consolidation. By the way, the level of rates yesterday prior to this announcement wasn't exactly out of line with fundamentals considering what we know. So my concern over the medium term was this would bring fiscal back into the limelight given the announcement yesterday.
Anything, Jay, you'd want to add on the broader approach to debt management that the Treasury is taking? Yes. Listen, I think the Treasury Department is tasked with funding the government at the lowest cost and taxpayer over time.
It's also tasked with being regular and predictable, and it's argued that – one can argue this is the dual mandate that it has – has allowed it to be the largest issuer of government bonds globally. And that this regularity and predictability allows it to get by with issuing at less of a discount considering our debt-to-GDP ratios. With what happened yesterday, I think you could argue that this is a little bit of a move away from regular and predictable in that fashion.
And the reason that matters to me is if there's no corresponding fiscal action taken, markets could view this to be lacking credibility. So the debt management strategy I think there is like you're leaning in the direction of the lowest cost to the taxpayer over time, which is short-term good. But you're kind of losing a little bit of regular and predictable to go alongside it.
The other thing I think to say is this shift from long-end issuance to Treasury bill issuance, which is what these buyback operations are doing. The Treasury also runs a very quantitative framework for debt management. It's an optimal debt framework, or basically it makes the point right now it should be issuing in the intermediate sector of the curve.
So broadly speaking, the five- to seven-year point, that's the best place to minimize your rollover risk, best place to minimize the variability of your interest expense over time. It's also said, hey, we should be issuing less at the long end. So we can take with what was done yesterday some understanding of why they may want to do this.
But this same optimal debt framework also says you should be issuing less at the short end. So you're getting one half of the equation right and one half wrong there. So to me, like the things that are important with respect to debt management is we're losing a little bit of regularity and predictability.
We're also potentially dispensing with the advice given by its subset of private sector advisors. And then finally, that you're only listening to one half of what your own quantitative framework should be saying you're doing with respect to debt management. And I don't want to simplify it too much or make it overly philosophical, but if you thought of a yield as a market metric or a rate as a market metric, is there something to be said because you wrote about it in the report that there might be somewhat a divergence from the real drivers on the long end right now?
The Treasury secretary has obviously underscored that tremendously. Is there some justification there you can see with the long end being a bit wonky? Well, so again, I think there are global factors working, Sam.
And I think Japan is a key factor there. It's worth maybe 20 basis points, though. So, yes, it's worth something.
But you, as the debt manager of the largest government bond market in the world, like is something like 20 basis points that should be focused on when it's kind of exogenous to what's happening and probably requires more aggressive monetary action from Japan to take that on. Yeah. Around auctions, you mentioned auctions earlier and there was one happening right now.
Do you think this changes issuance strategy going forward or will it have to? May it? So, again, I think, you know, between this announcement yesterday and then the small change to the Treasury's forward guidance back two weeks ago, where it no longer said future increases in Treasury coupon auction sizes and sets of future changes.
It seems like it's trying to open up the distribution towards more aggressive changes to the debt management strategy, which could involve actually reducing long end auctions. So I think you run the risk on on that actually happening, given the evidence of what we've seen over the last two weeks right now. I think there is a buy line that this could have a powerful impact.
Should you take action to do so? But I think the body of evidence that we have seen globally from other debt management offices that have acted similarly is that while there's an announcement effect and on the day of this announcement, you know, long and yields may decline. Yield current may flatten.
And we've seen this in the UK with the first time it did it in the fall of 2022. But that success of that announcement after that, there's a reversal in the half life of these announcements are relatively shorter. So, again, I think it just goes to the notion that the debt management side matters for rate levels, but the fundamentals and fiscal side matter more.
OK, and then one more question for you, Jay, and then we'll turn to client questions. So please start to put them in if you haven't already. Let's say we're sitting in this exact same room six months from now.
I was kind of curious to think you'll get your view on what would determine whether this was a meaningful turning point for the Treasury market or maybe just a short lived market event we're talking about this week. I know that's a big question. Very open ended as well.
Flummoxed me, Sam. I mean, I don't think the rate the level rates in itself. Like, can you look at the level of swap spreads as some sort of indication, perhaps, because we know the primary driver of the term structure of interest rates in the Treasury market is monetary policy expectations.
And, yes, that transmission mechanism declines as you go through the curve. But, you know, I think perhaps the level of swap spread spreads. But I think, you know, if we're sitting here six months from now, whether it's been impactful or not, is whether it's followed on with any sort of fiscal consolidation to go alongside it.
You know, that those would be how it would be perceived to be, whether it's just a flash of the pen and just an attempt to stem the tide of raising rates or whether it's the beginning of a shift in focus for what has been running deficits that have been historically large as a share of GDP, given where we are in the economic cycle. OK, so we are now going to take a look at client questions. So.
Having the computer handed to me, thank you. And just to be clear, no one can see your questions, so feel free to put them in. Should we start with this one?
OK, so given the market sort of lack of reaction to the buyback announcement, if Treasury decides to cut back on auction sizes, do you see that having any sustainable impact on yields? If that doesn't work, what are the more realistic options to bring the borrowing rates down? No, I think that's a great question.
I try to touch on it briefly. But again, you know, I think if it were to take more aggressive action and cut auction sizes, I do think there would be a sizable impact on that announcement. You know, that's not the perfect corollary.
But in 2001, when we were running budget surpluses and there was a risk that the Treasury market was actually going to disappear, the Treasury Department unexpectedly, and it's a funding announcement day, decided to discontinue 30 year bond issuance. And the 30 year bond that day rallied by, I think, five points and another couple more points in the following day. So seven percent rally along the curve.
So there's an impact there. I think there's evidence, again, that when we look at the U.K. and what it did in the wake of its LDI crisis four years ago, that when it announced that in the wake of the dislocations occurred, it lowered long end yields and flattened the yield curve considerably as well. So I think if you were to take that step, there would be an impact that would be decisive on the day of the announcement and perhaps following through in the days after.
But I, again, don't think it would be lasting because the evidence of what we've seen from other debt management offices is that that ends up reversing the number of days, weeks, months later. And then every time it's successfully used after that, it seems to be less impactful. So I think it could be.
But I think you only use this if you really need to. Like, I think you need to use this if you feel like there's a dislocation in the market that is inconsistent with fundamentals. It's just hard for me to see that right now.
I mean, that's what I was thinking, whether it's FX rates, it seems, or commodities, it seems expensive to intervene in markets in this way. Yeah, I mean, I think, you know, I'm not an intervention expert by any means because we haven't seen intervention like this in the Treasury market in the past. And I defer to my colleagues in FX research on that.
But the case that they make is intervention can, I think, temporarily help stem the momentum, but not change fundamentals. And that's how I would view what was announced yesterday, too, that it could be impactful, but fleeting and not lasting unless accompanied by the right fundamental changes. OK, so we have another client question around the Treasury secretary who was on CNBC today and was making comments there.
And he made a reference to the fact that the buybacks could be more than four billion. So any comment on that in terms of size, impact from size, what that could look like? You know, I think if, you know, I think markets comprehended what was said in yesterday's announcement, that the doubling of those minimums was just that, a minimum of the maximum, so to speak.
So I think markets understanding it could do more if needed. But what is interesting to me is a lot of these buyback operations, and it's getting technical now for perhaps more macro participants, is a lot of these buybacks are focused in a single CUSIP in the 10 to 20 year sector or the 20 to 30 year sector. So you've got more of that same instrument being offered into this operation.
It could be ultimately that the Treasury Department has to reach more to buy more of these. And while they have an impact on the day of the operation, it may, again, not necessarily be lasting in nature itself. OK, so I'm going to do one more call for questions and I'm going to have one for you, Jay, in the interim.
So if you have any more questions, put them in. We can answer them. Jay, we do have a lot of corporate clients.
They care about rates a lot. So let's think of the role of CFO, treasurer, you know, finance office. What do you think this might mean for them?
Listen, I think whether it's for them or for an investor side client, it just brings more variability into the thought process over Treasury debt management than we've previously expected in the past. You know, does it change how I think they're thinking about their liability structure? I'm not sure it does, because to me, again, like I think I look at the moves in rates that we've had in the last month.
They've been large and perhaps been more than you would have anticipated given the change in monetary policy expectations. But it's playing catch up after having lagged for a period of time. So, you know, I think they need to be prepared for potentially more variability and moves in rates than anything else.
OK, that's helpful. Thank you. Another client question.
Do you think that if the buybacks were larger in size, could that cause inflationary pressure to remain elevated and cause the Fed to raise quicker than expected? So is there a Fed use there? See, this is not changing the monetary base.
It's not changing the level of debt outstanding. It's transforming the composition of the debt outstanding. So I don't think it should have an impact on inflation at all.
And therefore, as a read through, I don't think it should have an impact on the Fed. Like the secondary read there to follow on that question. We've got a number of questions recently.
The Fed just stopped its reserve management purchases of T-bills. Could this be a reason why the Fed would resume them if the Treasury Department will be selling more bills? I think they're completely separate decisions.
The Fed has stopped buying T-bills because it's very evident that funding conditions and reserves are ample, if not abundant. And I don't think an additional $14 to $16 billion in T-bills supply every quarter on the stock of debt of $6.5 trillion in T-bills would be enough to move the needle right there. Then let me just ask a follow up question.
We watched the CNBC interview this morning. It's not about overreacting to any one thing that was said. The Treasury Secretary did refer to the fact that the Fed and the Treasury would work together if there was any change of the balance sheet.
Can you elaborate on that? One of my favorite topics. Like I think, you know, you talked about this a lot, Sam.
I think there is an implicit Fed-Treasury report out there already. And we know that the Fed chairman wants to get the balance sheet smaller. These task forces are in progress right now with the expectation that they will deliver something by the end of the year.
I think there's a pathway to a smaller Fed balance sheet should be done in a way where it doesn't impact bank liquidity. So it requires liquidity regulatory reform. I think we argue that a smaller Fed balance sheet means higher rates and steeper curves overall.
So how would the Treasury Department counteract that? Probably through more short end issuance and not providing more duration supply to the markets. But I think there's a magic trick here.
And the magic trick to me is outside of the size of the Fed's balance sheet, it's the composition of its ownership. And you and I have talked about this. We did it on a previous webinar with Mike.
The average maturity of what the Fed owns in its Treasury portfolio is more than two and a half years longer than the average maturity in the Treasury market itself. And pre-GFC, what the Fed owned was actually shorter than the Treasury market itself. So there is close to $2 trillion in securities from the Fed's portfolio maturing in the next few years.
Right now it rolls them over passively at auction across the curve, pro rata to whatever the Treasury is auctioning as a passive participant at auction. If it decides to roll them over short end instead, it gets the balance sheet back to what it looked like pre-crisis. It also gets the Treasury Department more short end issuance, but not to the public in a way that does not impact rate levels.
So I think that's the coordination that's very, very powerful. Fascinating. OK, we have a few more questions.
Do you see a crowding out effect for bank deposits with increased bill issuance material increase? Well, I mean, I already think like there's been competition for bank deposits to begin with. And the reason we've seen money markets on day UM grow so considerably is that, you know, bank deposit betas relative to what money market funds or other equivalent vehicles can, I think, can pay means that there's greater demand for money market funds versus banks overall.
Again, I do not think an incremental $16 billion per quarter or $64 billion per annum will materially change that again, because the T-bill market is 22 percent of the debt outstanding and over $6.5 trillion in size. And then last question from clients right now, if the curve remains steep or keep steepening before the next buyback, is there anything else the Treasury could do? I think, again, you know, if you have to sort of pull a rabbit out of the hat, you could take more aggressive action on option sizes.
They've already seemingly tried to lay the groundwork for that, but leave themselves some optionality. But to me, that's almost in case of emergency, break the glass sort of event. And again, you could bank on that having an impact for a short period of time.
We just wouldn't expect it to be durable. OK, Jay, we covered a lot of ground before we close out and thank everyone. Anything else you want to add on this topic?
Maybe something we didn't cover from your report. You know, I think the only other thing to say is, you know, I've gotten a byline from a number of investors over the last days, like maybe this is being done because markets are illiquid and it's the summer. And that's true.
And perhaps that, you know, has reduced sort of duration demand overall. But we've been making the case here, Sam, for like the last six months that Treasury market liquidity has been on a steadily improving trend for the last number of years and in 2026. And when I look in particular at liquidity, the long end of the curve, we talked about dispersion.
We talked about liquidity preference. High level measures of liquidity are very close to decade highs. So, yes, it's a less liquid point on the curve than the others.
But it's been in the context of what has been a steady improvement in liquidity over the past few years. OK, so I don't see any other client questions. I want to thank everyone for tuning in for your time.
I want to thank Jay for his time and expertise. And as always, if any way we can help you, feel free to reach out to your sales representative or to us in research. That concludes today's webinar.
Thanks for joining. Thanks, everybody. This communication was provided for informational purposes only.
Please read the J.P. Morgan Research Reports related to its content for more information, including important disclosures. Copyright 2026, J.P.
Morgan Chase & Co., all rights reserved. This episode was recorded on Thursday, August 20th, 2026. Thank you.