Refusing to simply "borrow new to pay old"? The U.S. Treasury may use cash from the Treasury to support U.S. bond repurchases, putting the credibility of its rules to the test.

Two senior officials from the U.S. Treasury Department stated in an interview that the Treasury might choose to use part of its cash reserves to fund an expansion of its plan to buy high-yield old bonds. Following a surge in long-term U.S. Treasury bond yields to their highest levels in years last week, Treasury Secretary Yellen unveiled an expanded bond buyback plan. Bond traders had previously expected that the Treasury would fund these purchases by issuing more short-term debt, including Treasury bills with maturities of up to one year. The Treasury may tap into the Treasury General Account (TGA). As of August 20, this account had a balance of $935 billion. Historically, the Treasury has maintained a substantial balance to provide a buffer for expected government expenditurescovering everything from Social Security checks to payments to federal employees and contractors. As a result of this news, Treasury bond prices increased, with the yield on the 10-year Treasury bond briefly falling by 4 basis points to 4.69%. The senior officials interviewed did not rule out the possibility of using short-term Treasury bonds to finance the buyback, which essentially involves replacing one form of debt with another. Reducing cash reserves could avoid this "issuing new debt to pay off old debt" operation. The officials did not specify how much TGA funding might be used, if applicable. As early as 2015, the Treasury established a policy of holding at least an amount equal to five days of expenditures (or a minimum of $150 billion) in the account to guard against interruptions that would prevent access to the debt market. When the Trump administration took office, some market participants speculated that the Treasury's guidelines might change, though such discussions have gradually faded over time. Recently, the Treasury has been exploring alternative uses for its remaining cash, with officials discussing the possibility of placing some funds in the repurchase agreement (repo) market. For decades, the U.S. Treasury has adhered to a tradition of altering its approach to managing federal debt only after extensive consultations internally and with market participants. A principle the Treasury has maintainedwhich Yellen endorsed repeatedly in her keynote speech last Novemberis to ensure that its operational methods are rule-based and predictable. Some analysts pointed out that just two weeks after the preliminary quarterly timetable for the plan was released, the Treasury suddenly decided to ramp up buybacks, risking damage to its image of rule-based and predictable. Its risk lies in investors demanding a higher premium to purchase U.S. Treasury bonds (especially those with extremely long durations) in anticipation of unexpected changes to future auction sizes. Lou Crandall, a senior economist at Wrightson ICAP LLC, wrote in a report on Monday: The decision to increase long-term buybacks is not necessarily radical in itself, but the timing and framing of this decision are evidently quite aggressive. Crandall noted that for years, the Treasury has focused on assuring investors that it would not manipulate the market for its own short-term gain. And that commitment evaporated last week.