What will save the US debt? Bessenet is eyeing the trillion-dollar fund pool

Author: Gelonghui

According to a report by CNBC today titled "Bessent could tap near $1 trillion Treasury General Account to fund bond buybacks, sources said," the Treasury Department may utilize the Treasury General Account (TGA) to provide funding support for expanding bond buybacks.

The TGA is essentially the government cash account held by the U.S. Treasury at the Federal Reserve.

Government tax revenues and the issuance of Treasury bonds can enter this account; government expenditures and debt repayments are also drawn from here.

Its scale may reach approximately $1.05 trillion by the end of October.

This means that the Treasury indeed has a significant cash buffer, allowing it to rely less on new short-term debt in the short term to complete some buyback operations.

Why is this necessary?

On August 19, the yield on the U.S. 30-year Treasury bond reached 5.34%, the highest level since 2007.

Subsequently, the Treasury announced that it would increase the scale of long-term Treasury bond buyback operations from a maximum of $2 billion each time to at least $4 billion, covering nominal Treasury bonds with maturities of 10-20 years and 20-30 years.

However, as of now, the yield on the U.S. 30-year Treasury bond still hovers near the high levels seen since 2007.

This indicates that the market today is not simply lacking liquidity.

If the Treasury were to directly issue a large amount of short-term Treasury bonds to raise funds, the new liquidity would still need to be absorbed by the market, potentially leading to an increase in short-term financing supply.

However, if the TGA is used first, this step can be temporarily bypassed.

When the Treasury spends the money in the TGA, the funds ultimately enter the private sector financial system, and under unchanged conditions, bank reserves in the banking system may increase.

The New York Fed previously pointed out that changes in the TGA balance directly affect liquidity in the financial system; when the Treasury withdraws a large amount, it may temporarily increase system liquidity, while replenishing the TGA may conversely absorb liquidity.

Therefore, if the Treasury indeed relies more on the TGA to complete buybacks, the feedback in the short term is likely to be:

Treasury reduces cash balance → Market liquidity increases → Long-term Treasury bond purchases increase → Long-term yields are suppressed.

This is why the market interprets the use of the TGA as a more aggressive strategy than continuing to issue short-term debt for financing.

However, this strategy is difficult to sustain in the long run.

The Treasury has clearly indicated that it needs to maintain a cash balance of about $950 billion by the end of September, so from a medium to long-term perspective, if the TGA declines significantly, it will still need to replenish the account through taxes, bond issuance, and fiscal cash flow.

In other words, it merely shifts the pressure of issuing short-term debt today into the future.

Moreover, the yield on U.S. long-term Treasury bonds is not solely determined by supply and demand.

Treasury buybacks can indeed improve liquidity and marginally reduce the supply of long-term bonds, thereby lowering term premiums.

However, if investors are genuinely concerned about the continuously expanding fiscal deficit in the U.S. over the next few years, then merely buying back tens or hundreds of billions of dollars in Treasury bonds is unlikely to change the long-term equilibrium.

What the market truly desires is a brand new fiscal plan, a more significant action.