The Lombard Review
Markets & Finance

The Treasury starts buying back its own debt

Off-the-run buybacks improve depth

The U.S. Treasury Building, Washington
The U.S. Treasury Building, WashingtonPhoto: MeanieHyaena / Wikimedia Commons, CC BY 4.0
1 min read Data: Programme announced 1 May

The US Treasury has officially launched an innovative liquidity-support mechanism: its first regular sovereign debt buyback programme since the early 2000s. Under the facility, the Treasury will purchase off-the-run, older government securities from primary dealers, financing the purchases via additional issuance of liquid, on-the-run benchmark paper.

The New York Stock Exchange on Wall Street
The New York Stock Exchange on Wall StreetPhoto: Carlos Delgado / Wikimedia Commons, CC BY-SA 3.0

Greasing the Secondary Plumbing

The objective of the programme is not to alter the net supply of federal debt, but to improve liquidity in secondary fixed-income markets. Off-the-run Treasuries tie up primary dealer balance sheets and suffer from wider bid-ask spreads during market stress. By establishing a standing bid for illiquid maturities, the Treasury is effectively acting as a market-maker of last resort for its own sovereign obligations.

Canary Wharf seen from Wapping, East London
Canary Wharf seen from Wapping, East LondonPhoto: Diliff / Wikimedia Commons, CC BY-SA 3.0

The Treasury’s debt buyback initiative is a crucial enhancement to market plumbing, providing vital liquidity to secondary sovereign debt without altering the structural trajectory of the federal deficit.