What’s Behind the U.S. Treasury’s Latest Attempt to Lower Interest Rates

The Trump administration’s push to improve affordability — for itself and consumers — is under threat from a rise in government bond yields, prompting the Treasury Department to make a series of moves to try to lower them.

These yields act as the economy’s benchmark interest rates, not only reflecting the cost to the government to borrow money but also acting as a guide for rates on consumer mortgages, business loans and many other types of debt. Higher yields leave the government and many American households with greater interest costs, a particularly pertinent issue ahead of the midterm elections.

The Treasury Department’s latest tactic, announced last week, is to increase the amount of its own long-term debt that it is permitted to buy in the open market — a practice known as buybacks.

By buying its own debt, the Treasury increases demand for the bonds, raising their price and — because prices move in the opposite direction to yields — pushing borrowing costs lower.

Government yields initially fell sharply after that intervention but steadily rebounded to erase nearly all of the decline at the end of last week. Yields dropped again on Monday, as investors tried to anticipate Treasury Secretary Scott Bessent’s actions as well as the risks blockociated with the various moves he could make.

Here’s how buybacks work and the effects they might have on the bond market.

Where does the money come from?

Typically, bond buybacks are financed by issuing more debt. That is why they can perhaps more easily be thought of as debt swaps.

The Treasury Department’s main worry is longer-term bond yields. The 30-year Treasury yield, indicative of what it would cost the government to borrow money for that amount of time, recently hit its highest level in almost two decades. The 10-year yield, a vital reference rate for mortgage debt and other loans, is hovering around its peak since President Trump took office for a second term.

It is these longer-dated bonds that the Treasury Department says it may buy in greater amounts.

Since the start of Mr. Trump’s second administration in 2025, the Treasury Department has funneled all new borrowing needs into short-term debt, known as bills, that mature in a year or less. The increase in supply of bills puts upward pressure on shorter-dated interest rates but avoids a similar impact on longer-dated yields.

Angelo Manolatos, an ***yst at Wells Fargo, estimated that the Treasury Department would increase new bill issuance by $16 billion per quarter to fund its expanded buyback program. This leaves the overall amount of government debt the same, but with an altered composition.

Before he became Treasury secretary, Mr. Bessent criticized his immediate predecessor, Janet L. Yellen, for shifting new debt issuance into short-term bills — a policy Mr. Bessent has maintained since taking charge.

There are risks to this approach. By increasing the amount of short-term debt the government issues, the Treasury is making the government’s finances more dependent on the direction of short-term interest rates. These rates are generally more susceptible to sudden shocks, like war, a pandemic or a sharp change in the economic outlook. They are also more responsive to the overnight rates set by the Federal Reserve, where some officials have argued in favor of raising rates to get inflation under control.

Do bond buybacks work?

Yes, to an extent.

Mr. Bessent’s announcement last week preceded a steep drop in long-dated yields, but they have since drifted up, in a choppy trade.

Even after doubling to “at least” $4 billion per weekly operation, starting on Sept. 9, the Treasury Department’s buybacks would be a fraction of the $30 trillion Treasury market, which trades over $1 trillion per day, according to the Securities Industry and Financial Markets Association. But the impact can be larger if the exercise is focused on a particular debt maturity. Mr. Manolatos at Wells Fargo said that if all the buybacks were focused on the 20-year Treasury, it would effectively reduce issuance of that bond by 38 percent.

There are other ways the strategy can bring down yields.

Typically, the Treasury Department purchases older bonds that have been traded for some time. Investors tend to prefer the newest securities, so these older bonds tend to trade with a slightly higher yield. Removing them from the market puts downward pressure on borrowing costs.

Does the Treasury have to use debt to fund buybacks?

In theory, the Treasury Department could use the cash it has on hand to repurchase its debt. This cash is held in what’s called the Treasury General Account, which acts like the government’s checking account and includes a mix of tax revenue, debt issuance and other sources of funds.

Mr. Bessent has lifted the size of that account to $954 billion, up from an average of $750 billion in the final year of the Biden administration. By running down this account the government could avoid issuing more debt, for a time, until its balance fell to a point that necessitated replenishing, and this new money would probably be raised in the bond market.