US Treasury increases sizes of long-end liquidity support buybacks

The US Treasury is scaling up its program to buy back older, less-liquid government bonds, with a particular focus on the securities that sit furthest out on the yield curve. Starting September 9, the agency will increase the size of liquidity support buyback operations targeting longer-dated nominal coupon securities, a move that follows a broader overhaul announced during the July 30 quarterly refunding.

What’s actually changing

For the 10-to-20-year and 20-to-30-year maturity buckets, the frequency of liquidity support operations has been doubled from two per quarter to four. Each of those long-end operations carries a maximum size of $2 billion, while many shorter-dated nominal coupon buckets can run up to $4 billion per operation.

Across all maturities and security types, the total quarterly capacity for liquidity support buybacks has been raised from $30 billion to $38 billion. That increase took effect on August 13.

The targets of these operations are off-the-run securities. When the Treasury issues a new 10-year note, the previous 10-year note becomes off-the-run. It’s the same creditworthy obligation, but it trades less frequently, which makes it harder and more expensive for dealers to hold on their balance sheets. The buyback program gives primary dealers and other eligible counterparties a reliable way to sell those less-liquid bonds back to the government.

The Treasury is projected to conduct 57 buyback operations in 2025, up from 41 in 2024. For context, the government ran just 17 total operations across the entire stretch from 2002 to 2023. The program was effectively dormant for two decades before being reinvigorated in May 2024.

Why the long end matters

When liquidity dries up in longer-dated bonds, wider bid-ask spreads raise borrowing costs. Dealers become reluctant to warehouse inventory, which makes it harder for large institutional investors to execute trades without moving the market against themselves.

The program is designed to avoid meaningfully altering the weighted average maturity of outstanding Treasury debt. The government isn’t shortening the duration of its obligations. It’s simply recycling older bonds off dealer balance sheets while continuing to issue new ones at auction.

A program reborn out of necessity

The original Treasury buyback program ran from 2000 to 2002, when the government was running budget surpluses and had excess cash to retire debt. The current version isn’t about reducing the national debt. With total marketable Treasury debt now measured in the tens of trillions, the volume of off-the-run securities has ballooned. Each new auction effectively creates another cohort of bonds that will gradually become less liquid over time.

The May 2024 relaunch started modestly, with limited operation sizes and frequencies. The successive expansions, first in the quarterly refunding earlier this year and now with the September sizing increase, suggest the Treasury views the program as successful enough to warrant scaling up.

What to watch going forward

The $38 billion quarterly cap is a rounding error against the backdrop of roughly $28 trillion in marketable Treasury securities. The operations remain small relative to total outstanding debt, functioning more as a lubricant than a market-moving force.

If the Treasury continues on its current trajectory of expanding the program, the next logical step would be further increases to per-operation limits in the long-end buckets, where $2 billion caps are more restrictive than the $4 billion allowed for shorter maturities. Any such change would likely be telegraphed during a future quarterly refunding announcement, consistent with the Treasury’s approach of making adjustments in a predictable, well-communicated manner.

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