The Trump administration responded to global anxiety around rising inflation and the war in Iran on Wednesday, making a surprise move to calm bond markets as they showed signs reminiscent of the 2007 financial crisis.
The Trump administration’s announcement — that it would be doubling its bond buybacks through early November — had almost immediate effect: Yields pulled back from record highs. But economists warn that Treasury Secretary Scott Bessent’s course of action is only a short-term fix for a much larger problem.
“Steps like that taken this morning will prove to be a temporary salve to an open financial wound of our own making,” said Joseph Brusuelas, principal and chief economist for RSM US LLP.
The volatility of the bond market has put the administration on uneasy footing for weeks; yields on 30-year and 10-year bonds have soared, putting the U.S. economy in a dangerous position. The higher the yields, the higher the borrowing costs for homebuyers, auto loans, business investments and more, creating ripple effects across the entire economy.
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On Wednesday, the Treasury Department announced it will expand its government debt buyback operation from $2 billion maximum to at least $4 billion, focusing on the 10- to 20-year and 20- to 30-year sectors. The operation, which will last from Sept. 9 through the end of the refunding quarter on Nov. 4, will buy up long-term debt and take short-term debt off the market, rebalancing the makeup of U.S. Treasury bonds on the market to reduce risks to the economy.
“This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants,” the Treasury release said.
The yield on 30-year U.S. Treasury bonds this summer exceeded yields during the 2007 financial crisis, hitting 5.3% on Monday. The high yields have been attributed to global anxiety around inflation, trade wars and the war in Iran, which has left the Strait of Hormuz, a major shipping route, closed for months.
Yields above 6% pose risks to small- and medium-sized banks, because too-high yields reduce the value of bonds they’ve stockpiled. Mortgage rates, home loans and credit card payments use the 10-year U.S. Treasury bonds as a benchmark.
The Treasury’s expanded buyback operation seeks to tamp down on those high yields, potentially helping prevent bank failures and the buckling of the global economy, which is heavily reliant on U.S. government debt holdings. The yield on 30-year U.S. Treasury bonds dropped several basis points shortly after the Treasury’s announcement Wednesday morning.
While the bond market reacted quickly to the Treasury’s announcement, it’s only a temporary solution, economists warned.
Brusuelas says the buyback will not be enough to contend with the risks posed by the United States’ ballooning debt, persistent inflation and private artificial intelligence companies’ dominance.
He added that Bessent’s bond move will make Federal Reserve Chair Kevin Warsh’s job of bringing inflation down to 2% harder. The inflation rate came in at 3.4% in July.
“Bessent is a political actor. His interest is purely short term and is organized around the upcoming election and not a return to price stability,” Brusuelas said. “This is what fiscal dominance looks like as the fiscal authority leans on the central bank to subordinate its goal of price stability to the government’s borrowing and political needs.”
The Treasury’s plan to buy up bonds will increase the money supply, adding to the likelihood that the Fed will raise interest rates to limit inflation, said Ryan Young, a senior economist at the libertarian think tank Competitive Enterprise Institute.
He characterized the unease in the bond markets as a symptom of the United States’ larger fiscal issues, including the federal debt approaching $40 trillion and looming Social Security insolvency.
“When you see story after story about multitrillion-dollar problems like that, that’s going to make people a little less confident in the government’s ability to repay bonds in 10 years or 30 years, so I think that’s the root of the problem,” Young said.
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