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Among the jewels: Treasury Department paid 88 cents on the dollar to buy back 10-year Treasury notes sold at auction Aug. 2020 at a record-low yield of 0.677%.
By Wolf Richter for WOLF STREET.
The Treasury Department’s buybacks of Treasury securities — it kicked off that program in April — show on an anecdotal basis what is going on in the market, including the bloodletting among longer-dated Treasury securities due to rising yields since mid-2020.
So far in October, there have been four buyback auctions – one per week. The Treasury department announces beforehand what securities by CUSIP Number it offers to buy back. The Primary Dealers submit their bids at what prices they’re willing to sell. Those bids are evaluated, some are accepted, others are not.
In total over those four auctions in October, the Treasury bought back $7.0 billion at par value (face value) in securities. But that’s not the amount it paid. It bought back many issues at a substantial discount to par value. As we can see, the buyback amounts are relatively small in the huge universe of the Treasury debt outstanding.
Treasury Buybacks in October, amounts at par value
Auction Date
Issues eligible
Maturitydate range
Offeredmillion $
Acceptedmillion $
2-Oct
26
Oct 2025 – Jan 2032
1,384
235
10-Oct
26
Oct 2029 – Sep 2031
4,963
2,469
16-Oct
49
Oct 2027 – Sep 2029
10,257
4,000
23-Oct
18
Jul 2032 – Feb 2054
977
323
Totals
17,581
7,027
We’re going to look at a few specific bond issues that the Treasury department bought back at each of the past four auctions.
On October 23: bought back TIPS:
Holders of TIPS (Treasury Inflation Protected Securities) get paid interest every six months at a fixed rate. In addition, the inflation protection amount, based on CPI, is added to the principal of the TIPS. So with inflation, the par value of the security grows, and the percentages here are off par value that includes the inflation protection amount added to the principal. Here are four of the issues it bought back.
At 62.04% of par value, bought back $10 million of 30-year TIPS, issued in August 2020 at a negative yield of -0.272%, the first time in history that TIPS sold at auction at a negative yield. Crazy times, back in mid-2020, as the Fed had just gotten done with $3 trillion in QE over a three-month period. The TIPS mature in February 2050, CUSIP Number 912810SM1.
The Fed, back when it still did QE, waded deeply into the relatively small TIPS market, mostly in the secondary market through its Primary Dealers. At this TIPS auction in August 2020, the New York Fed’s SOMA desk bought $608 million of these 30-year TIPS, or about 9% of the total issued.
At 58.78% of par value, bought back $40 million of 30-year TIPS, issued in August 2021 at a negative yield of -0.292%, maturing in February 2051, CUSIP Number 912810SV1.
The Fed bought $1 billion of these 30-year TIPS, or about 11% of the total issued.
At 91.47% of par value, bought back $15 million of 10-year TIPS, issued in September 2022 at a yield of 1.248%, maturing in July 2032, CUSIP Number 91282CEZ0. In September 2022, the Fed had already started QT and didn’t buy any TIPS at that auction.
At 96.0% of par value, bought back $40 million of 10-year TIPS, issued in July 2023 at a yield of 1.49%, maturing in July 2033, CUSIP Number 91282CHP9. At this auction in July 2023, the Fed was deep into QT and bought none.
On October 16: bought back 7-year & 10-year notes, including:
At 90.48% of par value, bought back $175 million of 7-year notes, issued in October 2020, at a yield of 0.60%, maturing in October 2027, CUSIP Number 91282CAU5. These 7-year notes have 3 years left to run and so they currently trade like 3-year notes.
At this auction in October 2020, when QE was in full swing, the Fed bought $5.6 billion, or 9.6% of the total.
At 96.55% of par value, bought back $176 million of 10-year notes, issued in February 2018 at a yield of 2.81%, maturing in February 2028, CUSIP Number 9128283W8. At the auction in 2018, the Fed bought $4.5 billion or 19% of the total.
At 90.3% of par value, bought back $139 million of 7-year notes, issued in December 2020 at a yield of 0.66%, maturing in December 2027, CUSIP Number 91282CBB6. At the auction in 2020, the Fed bought $9.0 billion of them, or about 13% of the total.
At 90.25% of par value, bought back $129 million of 7-year notes, issued in August 2021 at a yield of 1.16%, maturing in August 2028, CUSIP Number 91282CCV1. At the auction in August 2021, the Fed bought $7.8 billion of them, or 11.2% of the total.
On October 10: bought back 7-year & 10-year notes, including:
At 100.25% of par value, bought back $17 million of 7-year notes, issued in October 2022 at a yield of 4.03%, maturing in October 2029, CUSIP Number 91282CFT3.
These notes have a coupon interest rate of 4.0%, and with 5 years left to run, they trade like a 5-year yield which is currently 4.03%. At the auction in October 2022, the Fed didn’t buy any of them.
At 88.29% of par value, bought back $377 million of 10-year notes, issued in April 2020 at a yield of 0.78%, maturing in February 2030, CUSIP Number 912828Z94.
It seems hard to imagine today that someone would actually buy a 10-year note with a yield of 0.78%, but the March-to-May 2020 period was when the Fed was buying about $3 trillion in securities in the secondary market through its primary dealers in order to drive down yields and digest the $3 trillion in new Treasuries that the government was issuing over the same period.
The bulk of QE – to increase its holdings – was done in the secondary market. So at this auction in April 2020, the Fed only bought $82 billion of the 7-year notes.
At 82.71% of par value, $390 million of 10-year notes, issued in August 2020 at a yield of 0.677%, which was the lowest yield ever for a 10-year note sold at auction. They mature in August 2030, CUSIP Number 91282CAE1.
At the auction in August 2020, the Fed bought $22.6 billion of these misbegotten 10-year notes, or 37% of the total – and these duds are lodged on it balance sheet to this day. The Fed will hold them to maturity, collect 0.625% in coupon interest a year, and get face value back at maturity.
On October 2: bought back TIPS, including:
At 97.08% of par value, $22 million of 10-year TIPS, issued in January 2018 at a yield of 0.548%, maturing in January 2028, CUSIP Number 9128283R9.
At the auction in January 2018, the Fed bought $1.9 billion of these TIPS, or about 12.8% of the total.
At 99.28% of par value, $10 million of 5-year TIPS issued in June 2023 at a yield of 1.83%, maturing in April 2028, CUSIP Number 91282CGW5. At that auction in June 2023, the Fed bought none.
Some buyback technicalities.
Buybacks are not new. The Treasury Department was buying back older Treasury securities in 2000 through 2002, and on a minuscule scale once or twice a year from 2014 onward, with amounts such as $25 million a year, just to test the plumbing.
Treasury cites some reasons for the buybacks, such as to help manage its cash after tax season when it’s drowning in cash; and creating liquidity in an end of the market that lacks it. The effect – and the real reason for them – would be slightly lower yields in that end of the market.
Buybacks are supposed to ease a liquidity problem. The problem in the Treasury market is that older “off-the-run” Treasury securities are hard to sell because there is little trading in them, and sellers have to accept a (small-ish) haircut when they do find a buyer. The US Treasury market is the most liquid bond market in the world, but it’s not that liquid for older Treasury securities. So Treasury stepped in as buyer of “off-the-run” securities. Recently issued “on-the-run” securities, however, are easy to sell without haircut.
Buybacks are not QE. QE involved money creation – buying bonds with newly created money. That’s what the Fed did until 2022. Treasury cannot create money. It can only get money from collecting taxes and from borrowing – huge amounts of borrowing – which means that the Treasury Department issues new securities that add to the debt; the cash proceeds get spent on budget items and servicing the existing debt, and a small portion of those cash proceeds is now used to buy back off-the-run Treasury securities. Treasury cancels the securities it bought back and they cease to exist. In other words, with these buybacks, Treasury is swapping older bonds for brand new bonds.
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The post Treasury Buybacks: Update on the Bond Market Bloodletting appeared first on Energy News Beat.
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