Besant brings Peashooter to tank battle, US Treasury repo hits a wall, 10-year US Treasury yield at three-year high

The efforts by US Treasury Secretary Yellen to significantly expand the Treasury repurchase operation have faced resistance in the market.

On Wednesday, the Treasury announced an increase to the single-long term Treasury repo cap to $600 million, tripling the originally scheduled scale last month. However, this move still failed to curb the selloff in the bond market. The 10-year Treasury yield touched a three-year high intraday, and after the repo statement was released that day, yields continued to rise.

Yellen had earlier made it clear that suppressing long-term yields was a policy objective, but current circumstances are moving in the opposite direction—Elevated oil prices are intensifying inflation concerns, market expectations for Fed rate hikes are rising, and soaring fiscal deficits have all combined to keep yields under upward pressure.

The dilemma in the bond market is directly affecting the real economy; US mortgage rates have climbed to their highest level in over a year.

The expansion of repo operations stems from Yellen’s recent public hints that the operation size could surpass $400 million, once prompting Wall Street to anticipate that single operations could reach as high as $1 billion. In this context, the $600 million cap left the market disappointed.

“It’s as if the Treasury has created a monster and now needs to keep feeding it,” said Deutsche Bank strategist Steven Zeng. He pointed out that the $600 million announcement failed to deliver the “shock-and-awe effect” investors were hoping for.

Elias Haddad of Brown Brothers Harriman & Co. put it even more directly: “At this point, the Treasury is showing up to a tank battle with a pea shooter.”

Calls for larger repo operations reflect the stubbornness of long-term yields. Later on Wednesday, the US Treasury auctioned $3.9 billion of 10-year notes at a record-high yield of 4.834%, the highest ever for this maturity.

Facing strong market reactions, Yellen admitted at an event in Texas on Tuesday that he cannot change the “equilibrium” price of Treasuries. He said his goal is merely to slow the pace of price volatility and prevent entrenched, harmful market narratives from spreading.

He attributed the swift rise of long-term yields to market panic over a perceived “US insolvency,” calling these worries “absurd, but they once dominated the narrative.”

Against this backdrop, Yellen characterized the expanded repo program as a “Treasury Twist,” drawing from the Fed’s historic Operation Twist to lower long-term borrowing costs. He added that repo operations help banks offload less liquid securities, making room to participate in new debt auctions.

Evercore ISI chief economist Krishna Guha and his team wrote in a client note that the Wednesday announcement “shows Yellen is accepting the limited role for repo operations,” and they believe he “has very likely realized the US cannot persistently prevent fundamentals from dominating yield trends.”

Wells Fargo macro strategists Angelo Manolatos and Francis Brown noted in their report that “other catalysts are needed to drive long-end yields lower,” listing possible conditions such as slowing growth and inflation, declining energy prices, reduced Fed policy uncertainty, fiscal consolidation, or a drop in corporate bond issuance.

In terms of short-term policy signals, the Treasury said Wednesday that the maximum size for each of the remaining six long-term nominal Treasury repo operations this quarter will be no less than $400 million. This language is the same as the surprise announcement on August 19, and does not send a clear signal for further size increases.

A Trump administration official cited by Fox Business stated, the Treasury will routinely monitor the effectiveness of repo operations and adjust their size as appropriate, depending on market functioning and liquidity needs.

It is worth noting that $600 million is a cap, not a fixed purchase amount. However, statistics show that since the repo program restarted in 2024, the Treasury has only failed to conduct a full allotment in two out of 52 long-term nominal Treasury repo operations, typically preferring to buy up to the ceiling.

Deutsche Bank’s Zeng further noted that the Treasury’s 11 a.m. “final repo announcement” can replace the “preliminary announcement,” so the final amount actually bought could exceed the cap.

The surprise expansion announcement on August 19 came outside the Treasury’s regular quarterly announcement window, catching investors off guard and sparking debate about a shift towards a more “interventionist” style of US debt management—a sharp contrast to the Treasury’s longstanding principle of “regularity and predictability.”

Several investors and analysts interpret this intensification of repo operations as an externalization of the Trump administration’s anxiety over rising long-term borrowing costs ahead of the November congressional elections. As US Treasury yields climb, mortgage rates have hit their highest level in over a year, posing a direct hit to ordinary consumers.

Yellen said in a September 1 interview with Newsmax: “I’m making sure there are no significant, severe adverse consequences.” But from the way the bond market is behaving, the tug-of-war with the market is far from over.