US Treasuries are dominating the headlines for all the wrong reasons. After the US Treasury announced that it will more than double the size of its long-bond buybacks, yields rose rather than fell. In other words, the world’s largest borrower told the market what it wanted, and the market said no.
This doesn’t just affect US Treasuries. It’s a major development for global bond markets at large. If you own a bond fund or ETF, you are already positioned in this fight. Working out why Washington is losing the battle and the war probably beats guessing when the situation might turn.
The US Treasury said it would ‘at least double’ buybacks of longer-dated securities, lifting the cap from US$2 billion to US$4 billion per operation and targeting the 10- to 20-year and 20- to 30-year parts of the curve. The larger operations will run from 9 September to 4 November.
Treasury Secretary Scott Bessent then tried to add more fuel to the fire. Buybacks ‘could be more than US$4 billion per issue’, he told markets, adding that the department has ‘a big toolkit’ and that ‘part of it is signalling’.
Officials later announced that the Treasury could draw on its General Account at the Federal Reserve (TGA), which Bessent has built to US$950 billion against the US$550–600 billion targeted by the previous administration.
The US president also entered the fray with typical brash candidness. Asked whether another intervention was coming, President Trump replied that ‘the ultimate intervention is our military. And if we have to use that, we will.’
He didn’t explain exactly what he meant, and nobody has since, but it was an ominous response to a question about US Treasuries.
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So, why are markets making a mockery of the US Treasury’s efforts to shore up its own borrowing conditions?
Three forces are working against them.
The first is scale.
US$4 billion per operation is a rounding error in a US$30 trillion market. Evercore ISI’s Krishna Guha called the plan ‘a weak form of Operation Twist’ that could backfire if it is read as a signal that Washington is struggling to fund the long end of its borrowing needs.
‘Today is a bad day for global bond markets. The problem with trying to artificially cap long-term yields – as with Treasury buybacks – is that yields jump if markets think buybacks are too small. This tells you underlying upward pressure is intense.’ Robin Brooks, Brookings Institution
The second is mechanics.
In short, this is not quantitative easing. The Fed creates reserves to buy bonds, whereas the US Treasury must fund its purchases by borrowing shorter and swapping long debt for bills.
The precedent is unflattering at best. The original Operation Twist began in 1961, and research by MIT economists Franco Modigliani and Richard Sutch found that long-term yields rose rather than fell in that case as well.
‘This is NOT bullish. This is NOT QE. All they are doing is swapping out long end for shorter term dated maturities. I have no idea why some colleagues were so excited about this. It is BEARISH that they have to do this at all. It’s a global trend that’s impossible to stop.’ Linda Raschke, retired hedge fund manager
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The third is global breadth.
This is not just an American problem. Japan’s 10-year yield hit 3% on 1 September for the first time since 1996, UK gilts touched a post-2008 high of 5.25%, and French 10-years their highest since 2008.
When the debt of every developed sovereign reprices at once, a domestic buyback programme like the US Treasury’s is a bucket against a powerful tide.
The arithmetic behind the US Treasuries market is indeed concerning.
US debt passed US$40 trillion in August while net foreign private demand for Treasuries fell to US$16.6 billion in June.
In other words, supply is rising as demand wanes.
This is bad news for global bond markets.
‘Taming the surge in yields is nearly impossible over the long term, even for the US Treasury itself, without a structural shift in several of these fundamental drivers. Simply put, “free money” is only “free” for so long.’ Kobeissi Letter
Australia imports the global term premium whether it wants to or not.
Hence, the local 10-year government bond yield has risen above 5.3%, a level last seen in 2011.
Source: Trading Economics
The risk to local interest rates appears to remain on the upside. NAB, Deutsche Bank and UBS are forecasting a hike to 4.60% on 29 September with trimmed mean inflation remaining sticky at 3.6%.
There is also a direct channel to Japanese events with growing fears that higher Japanese government bond yields will leave fewer Japanese buyers for Australian debt. TD Securities’ Prashant Newnaha called it ‘a genuine regime change’.
The key takeaway is that duration, rather than credit, is the dominant risk in defensive portfolios today.
A fund carrying seven years of duration loses roughly 7% of capital value for every one percentage point rise in yields, however good the credit.
Hence, the trade-offs within fixed income deserve more attention than usual for an asset class generally regarded as defensive.
Citi’s Jason Williams thinks there’s an argument for taking advantage of recent weakness in US Treasuries. He believes Bessent’s actions ‘all point to someone ready to do whatever it takes’. And with US midterms approaching, the political incentive to force yields down is real.
To that point, if the General Account is indeed deployed at scale, long bonds could rally hard.
The problem is what else that would do.
BNY’s strategists interpret TGA-funded buybacks as fiscal expansion and therefore dollar-negative, noting that gold’s rally to near US$4,400 an ounce reflected credibility concerns about the Treasury’s commitment to regular and predictable issuance.
Tilting further towards shorter-term bills also raises rollover risk just as central banks turn hawkish.
Hence, positioning for a much larger intervention is a bet on US politics rather than fundamentals.
That may work, although it’s an unpredictable pathway forward.
There are four jobs a defensive allocation might do here, and there are various bond ETFs created for each:
The lesson of the past month is that government announcements are cheap and balance sheets are expensive. Markets understand the difference. Washington has spent political capital, credibility and a great deal of airtime trying to move the 10-year yield, only to fail in a very public way.
‘Don’t fight the Treasury’ is a decent trading slogan. ‘Know what you own’ is a better investment plan.
Why are US Treasury yields still rising after the buyback announcement?
Because the programme is small relative to the market and is not quantitative easing. Buybacks are capped near US$4 billion per operation in a US$30 trillion market, and the Treasury funds them by borrowing shorter rather than creating money.
With US debt past US$40 trillion and net foreign private demand for Treasuries down to US$16.6 billion in June, supply outweighs the positive signal the buybacks were meant to represent.
How high are Australian bond yields in September 2026?
Australia’s 10-year government bond yield has pushed above 5.3%, its highest since 2011, and the 30-year is at a record.
The RBA cash rate is 4.35%, with NAB, Deutsche Bank and UBS forecasting a hike to 4.60% on 29 September while trimmed mean inflation sits at 3.6%.
What is duration risk and why does it matter now?
Duration measures how much a bond’s capital value falls when yields rise.
A fund carrying seven years of duration loses roughly 7% of capital value for every one percentage point rise in yields, no matter how strong its credit quality.
That makes duration, not default risk, the dominant risk in most defensive allocations today.
Are Australian bonds insulated from the global sell-off?
No. Australia imports the global term premium from other developed markets, particularly the US and Japan.
Which bond ETFs suit which risk?
For yield without duration, floating-rate and fixed-maturity exposures reset with the cash rate.
For core defensive exposure, composite funds cover the whole Australian investment-grade market.
Did Operation Twist work the first time?
Not according to the best-known study of it. The original Operation Twist began in 1961, and research by MIT economists Franco Modigliani and Richard Sutch found long-term yields rose rather than fell, which is why strategists have called the current buyback plan a weak form of the same idea.
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Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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