Original Article Title: Beware the Bond: Operation Twist is Back
Original Author: Trader Joe
Translation: Peggy

Editor's Note: This week, the U.S. 30-year Treasury bond yield rose to around 5.34%, reaching a high not seen since 2007. Subsequently, U.S. Treasury Secretary Besent announced an expansion of long-term bond repurchases, increasing the maximum single repurchase size of 10–30 year bonds from $20 billion to at least $40 billion, with the arrangement to be implemented between September 9 and November 4. Following the announcement, long-term yields retreated, the dollar weakened, and risk assets received some support.

Superficially, this was not a significantly large bond liquidity operation. The more worthy discussion is: why has the U.S. long-term rate risen to a level that requires a more proactive Treasury response? And is the market beginning to reinterpret the Treasury's "policy reaction function" to long-term yields?

In "Beware the Bond," as explained by Trader Joe, the recent selloff in long bonds cannot simply be attributed to inflation. The fiscal deficit continues to create bond supply, demand from traditional long-term bond buyers like Japan has shifted, and AI capital expenditure is generating a significant supply of long-term bonds in the credit markets, with these various forces collectively increasing the scale of long-duration assets that the market needs to absorb.

The author further likens Besent's expansion of long bond repurchases to the Treasury's version of "Operation Twist." This analogy captures the direction of "reducing market long-duration supply," but the two are not equivalent: the 2011 Operation Twist involved the Fed selling short-term bonds and buying long-term bonds, explicitly aiming to lower long-term rates and ease financial conditions; the current Treasury repurchase plan's official position is still to enhance secondary market liquidity and cash management. Therefore, what is truly worth noting is not the $40 billion itself, but whether this tool will increasingly take on a role in managing long-end financial conditions in the future.

Below is the translated original text:

Earlier this week, the U.S. 30-year Treasury bond yield rose to its highest level since 2007, leading to a partial retracement in U.S. stocks and a weakening dollar.

Then, Besent made a move.

The U.S. Treasury announced that it would increase the single repurchase size of some 10–30 year long-term bonds from a maximum of $20 billion to at least $40 billion, to be carried out between September 9 and November 4. Following the announcement, the 30-year Treasury bond yield retreated from its previous high of around 5.34% to around 5.2%, the dollar weakened further, and the stock market also stabilized.

U.S. 30-Year Treasury Bond Yield

The question is: Is this just a temporary fix for bond market liquidity, or does it signal a shift in the U.S. policy stance towards long-term rates?

To understand this, we first need to answer another question: Why has the long-end yield risen to this level?

Why Has the Long-End Yield Risen to This Level? It's Not Just About Inflation

The most intuitive explanation is inflation.

If investors are concerned that future inflation will remain high for an extended period, they will naturally demand a higher long-term Treasury bond yield as compensation. However, the author believes that this alone is not enough to explain recent developments.

At least from consumer surveys, there is no clear sign of runaway long-term inflation expectations. The University of Michigan's preliminary survey in August showed that the one-year inflation expectation had risen slightly from 4.2% to 4.3%, but the five-year inflation expectation remained at 3.3%. In other words, short-term inflation concerns still exist, but the "deanchoring of long-term inflation expectations" is not the only, and arguably not the most important, explanation.

Data Source: University of Michigan Consumer Survey

The long-term Treasury bond yield reflects more than just future short-term policy rates and inflation. Economic growth, term premiums, regulatory environment, how much the Treasury needs to issue in bonds, and how much long-term Treasuries insurance companies, pension funds, and foreign investors are willing to hold all affect long-end pricing.

What is currently most notable, according to the author, is that the supply of long-term bonds is continuously increasing, but traditional demand has not expanded synchronously.

The U.S. fiscal deficit means the Treasury still needs continuous funding, and whether this funding is done through short-term Treasury bills, medium-term notes, or 30-year long bonds directly affects how much duration risk the market needs to absorb.

If the Treasury relies more on short-term T-bills for funding, it reduces the long-term bond supply that the market needs to absorb, putting relatively less pressure on long-end yields. Conversely, if more funding shifts towards 10-year, 20-year, and 30-year securities, the market must absorb more duration, potentially putting greater upward pressure on long-end yields.

This is also why the debt issuance structure itself has increasingly resembled a macro variable.

Why is the Treasury Acting Now? 5.3% Long End Beginning to Impact Financial Conditions

Short-Term Debt Can Alleviate Long-End Pressure, But Liquidity Cushion is Thinning

The issue is that even short-term debt cannot be issued infinitely.

In recent years, when the U.S. Treasury issued a large amount of T-bills, a significant source of funding was the money market funds' funds originally placed in the Federal Reserve's overnight reverse repurchase agreement (ON RRP) facility. When short-term debt yields become more attractive, these funds can flow from RRP to Treasury securities, absorbing new short-term debt without significantly draining bank reserves.

However, this cushion is now nearly depleted. Federal Reserve data shows that ON RRP usage is currently close to zero on most trading days. At the same time, as of mid-year, the U.S. banking system reserves were around $3.1 trillion.

In the second half of 2025, the massive rebuild of the U.S. Treasury General Account (TGA) further drained bank system liquidity. Federal Reserve data shows that following the resolution of the debt ceiling issue, the TGA balance increased by approximately $442.0 billion at one point, leading to a notable decline in reserves.

This was also one of the backgrounds for the Federal Reserve's end of Quantitative Tightening (QT) in late 2025.

In October 2025, the Federal Reserve announced the halt of balance sheet runoff starting from December 1 and began to engage in Reserve Management Purchases (RMP) in December, purchasing short-term U.S. Treasury securities to ensure the maintenance of ample bank reserves.

These operations can easily evoke QE visually, but the policy objectives are different.

QE typically involves purchasing long-term Treasuries or MBS, actively lowering long-term yields, easing overall financial conditions; RMP primarily buys short-term securities like Treasuries, with the official aim of maintaining sufficient bank reserves and controlling short-term rates, rather than providing macroeconomic stimulus. The Federal Reserve also emphasizes that RMP does not indicate a change in monetary policy stance.

The concern is that if the Treasury continues to increase the proportion of short-term financing to reduce long-term supply, then when liquidity buffers like RRP are nearing depletion, new short-term debt may ultimately compete more with bank reserves.

At that point, the Federal Reserve may have to conduct more reserve management operations to maintain systemic liquidity. This sets up a delicate policy mix: the Treasury minimizing duration released to the market, while the Federal Reserve ensures ample reserves at the short end.

Japan and AI are Both Transforming the Supply and Demand Structure of Long-Term Bonds

The issue on the long end has another side: who will buy?

Japan has long been a key foreign investor in U.S. Treasury bonds. The latest U.S. Treasury International Capital (TIC) data shows that as of June 2026, Japan held approximately $1.116 trillion in U.S. Treasury bonds, remaining the largest foreign holder, but down about 2.3% from May.

At the same time, Japan's own long-term government bond yields are rising.

For domestic institutions in Japan such as insurance companies, banks, and pension funds, if Japanese government bonds themselves can offer increasingly attractive yields, the marginal attraction of allocating to U.S. long-term bonds may naturally decrease, especially after taking into account the USD hedging costs.

This does not necessarily mean that Japan will continue to sell U.S. bonds on a large scale, but it does mean that a structural buyer of long-term bonds that has long existed in the past may no longer consistently absorb U.S. duration as stably as before.

Another competitor comes from AI.

The AI infrastructure build-out is transitioning from a stock market story to a credit market story. Goldman Sachs research estimates that from 2026 to date alone, the entire AI-related ecosystem has issued close to $500 billion in debt; of which the hyperscale cloud players themselves have issued around $194 billion. More importantly, it's the tenor. This year, in the U.S. investment-grade credit market, about 40% of new issuances with a tenor of 15 years or longer have come from AI firms or AI-related financing.

This means that traditional long-duration funds such as pension funds and insurance companies are facing more choices. They are no longer just comparing 30-year U.S. Treasury bonds and other sovereign debt, but can also purchase long-term investment-grade bonds of large tech companies like Amazon, Google, and AI-related credit assets such as data centers and infrastructure.

From the author's perspective, this makes the core issue facing U.S. long-term bonds even clearer: the Treasury needs to sell more and more debt, while the other long-term assets that global markets need investors to absorb are rapidly increasing.

Treasury's Version of Operation Twist: $4 Billion Is Not Huge, but the Real Change Lies in the Policy Response

It is also in this context that the Bizarro expands its long-term bond buybacks.

The U.S. Treasury's regular buyback program began in 2024, with the official setting two purposes: to improve secondary market liquidity and for cash management.

Notably, the liquidity support repo primarily purchases older, less liquid securities, known as off-the-run Treasuries. The Treasury Department proactively positions itself as a potential buyer of these bonds, aiming to assist dealers in depleting inventories and enhancing the trading dynamics of these older securities. (U.S. Department of the Treasury)

Therefore, from a structural perspective, this is not a QE tool designed to cap the 30-year yield.

Moreover, a one-time purchase of at least $40 billion in the vast $30 trillion U.S. Treasury market remains relatively small. Reuters also notes that the market widely believes this scale is insufficient to address structural issues such as the fiscal deficit and long-term supply expansion.

However, the author's true focus is not on the scale but on the policy intent.

In the past, the Treasury could emphasize that repos were merely market liquidity tools; now, as the 30-year yield rapidly approaches a two-decade high, the Treasury swiftly expands long-dated bond repos, prompting market participants to question: if the long end continues to spiral out of control, will the Treasury further adjust its repo and issuance structures in the future?

This is why the author refers to the current policy as the Treasury's version of "Operation Twist."

Note: Operation Twist is often referred to as "扭曲操作" or "期限延长操作" in Chinese. Its essence is not "printing more money" but adjusting the central bank's bond maturity structure: selling short-term bonds, buying long-term bonds to depress long-term rates.

The classic 2011 Operation Twist was conducted by the Federal Reserve: selling or letting short-term bonds mature while simultaneously purchasing an equivalent amount of 6-30 year bonds, elongating the asset portfolio duration without expanding the balance sheet, reducing the private sector's holdings of long-term bonds, and lowering long-term rates.

What is happening today is not an exact replica of the same operation. The Treasury is not executing a strict "sell short, buy long" like the Fed did back then, and the expanded repos are still officially defined as debt management and liquidity tools. However, from a market duration supply standpoint, both are somewhat aligned: if the Treasury continues to repurchase more long-term old bonds while leaving more net financing pressure on the short end, the net duration that the private market needs to absorb may relatively decrease.

This is what the author refers to as the "Treasury's version of Operation Twist." More precisely, it is currently a market interpretation rather than an established new policy framework.

Can This Approach Anchor the Long End? Risks May Shift to the Dollar and Inflation

So, under what circumstances would this policy framework continue to escalate? The author argues that instead of looking for an absolute 30-year yield "red line," it is better to observe the speed of the yield increase. A 30-year yield at 5.2% or 5.3% may not be sufficient on its own to trigger a policy change; but if the market begins to see consecutive rapid jumps of around 10 basis points each time, indicating a significant deterioration in market liquidity and demand, the probability of further intervention by the Treasury Department or the Federal Reserve would increase.

Meanwhile, long-dated bond yields have become more directly competitive for funds with equities. As per the data available when the author's article was published, the nominal yield on 30-year U.S. Treasuries is around 5.2%, while the real yield on long-term TIPS is close to 3%; in comparison, the S&P 500 earnings yield is around 3.8%.

While these cannot be directly compared — the earnings yield is not a risk-free rate, and corporate earnings are expected to grow or decline in the future — when the risk-free long-term real yield rises to such a high level, it is evident that the opportunity cost that stock valuations must bear is increasing.

Therefore, the key significance of Bostic's recent move may not be in temporarily pulling the 30-year yield back from above 5.3% to around 5.2%.

It lies in the market getting a new sample of observation: when U.S. long-end yields rise rapidly, will the Treasury Department become increasingly proactive in responding through repurchase sizes and debt maturity structures?

If the answer gradually shifts to "yes," then in the future, the impact on the U.S. dollar, U.S. stocks, gold, and long-term government bonds will involve not just the Fed's policy reaction function but also this additional layer of the Treasury Department.

However, this logic also has its boundaries. If the rise in long-dated yields is primarily due to a bond supply-demand imbalance, reducing the duration that the market needs to absorb may alleviate the pressure; if inflation expectations notably rise again, continuing to expand repurchases, increasing short-term debt financing may instead make market participants concerned that policies are artificially suppressing financial conditions.

Therefore, what truly needs to be observed next is not just whether the Treasury Department will increase repurchases but whether inflation expectations, the structure of long-term bond issuances, overseas demand, and the speed of long-end yield fluctuations are all changing simultaneously.

Only when these variables continue to point in the same direction will the author's proposition that the "Treasury Department is taking over a part of long-end financial conditions management" receive further validation.

[Original Article Link]

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