Wall Street Says Treasury Buybacks Are a Long Way Off, If at All

(Bloomberg) -- The US Treasury won’t buy back government debt to shore up market functioning before May 2023, if ever, analysts are saying.

Wall Street is split on if the Treasury will act after the agency pledged to further explore an initiative to buy back older securities, which could address concerns about the difficulty in being able to trade certain Treasuries. Findings will be shared in subsequent quarterly releases, according to an announcement on the agency’s debt-management strategy released Wednesday.

The pledge suggests concerns on liquidity in the nearly $24 trillion Treasury market aren’t pressing for the official sector, even as liquidity metrics for the US government debt market approach crisis levels after a year of steep losses for bonds, driven by rising inflation and Federal Reserve interest-rate increases, and as the central bank simultaneously cuts some of its holdings. 

Economists from Jefferies Financial Group Inc. said they doubted a buyback program would ever see the light of day while JPMorgan Chase & Co. (NYSE:JPM) experts said a plan is likely quarters away, though “unlikely to meet the market’s lofty expectations.”

Last month, Secretary Janet Yellen flagged the potential for buybacks of certain US government securities, acknowledging that it has become more difficult to buy and sell some securities, particularly in larger amounts, in recent years. 

Here’s what else strategists are saying: 

Bank of America (NYSE:BAC) (Meghan Swiber, Mark Cabana, Katie Craig)

• Market appeared somewhat disappointed with the lack of clear buyback commitment as the 20-year cheapened 3 basis points on the 10-20-30 fly
• May hear more on buybacks at the Treasury Conference on Nov. 16, and a proposed framework at the February refunding, with a May 2023 rollout “the earliest we can practically envision”
• Views on buybacks are unchanged: any program would likely be small to start and weighted average maturity neutral -- potentially disappointing market expectations --  timing will be complicated and potentially slowed by a Treasury Secretary transition, and debt limit issues that could lower the Treasury’s cash balance

JPMorgan (Jay Barry and others)

• Any buyback facility is likely quarters away and “unlikely to meet the market’s lofty expectations,” which was evident in the sharp decline in Treasury curve’s root mean square error (RMSE) in prior weeks
• Treasury curve dispersion was more extreme in the 10- to 20-year sector, where RMSE dropped by more than 50% over the last 3 weeks
• Given the unlikelihood a buyback facility will come to fruition in coming months and liquidity is set to seasonally decline, off-the-run securities should underperform in coming weeks

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Wrightson ICAP (LON:NXGN) (Lou Crandall)

• Buybacks are under active consideration, “but not an on active timeline”
• That pushes the introduction of any buyback program out to next spring, at the earliest

RBC Capital Markets (Blake Gwinn)

• Treasury’s announcement did little to “disabuse us” of the view that any meaningful buyback program is imminent and the dealer survey was likely “more of an exploratory exercise”
• “This was the second quarterly discussion on the topic that ended with no conclusion or decision, but only a recommendation for further study,” which suggests Treasury doesn’t have “a particularly burning desire to do this”
• There’s still some possibility of ad hoc, limited run buyback programs in the future targeted at cash and maturity management, such as to maintain bill supply during a debt limit episode or smooth out humps in the maturity schedule

Goldman Sachs (NYSE:GS) (Praveen Korapaty, William Marshall)

• The likelihood that buybacks are ultimately operationalized is high, sees $200 billion to $250 billion per year in buybacks (spread across the curve) as a reasonable size for the program
• Treasury signaled that it would share its findings from the last two quarters of outreach at some point in the coming quarters, “with little indication given in terms of specifics”
• TBAC minutes appeared to suggest the majority viewed roughly duration- or maturity-matched issuance to finance the buybacks as appropriate, suggesting implementing buybacks as switches is an attractive way to achieve this

TD Securities (Priya Misra, Gennadiy Goldberg)

• Treasury should further explore an “envelope approach” to funding buybacks, giving guidance on how much they intend to buy back each year and adjust on a quarterly basis
• Earliest Treasury would launch such a program would be the May 2023 refunding meeting
• Strategists remain long T 1.875% 2/41s vs T 4.75% 2/41s as they expect off-the-run Treasuries to richen once Treasury announces a buyback program; while the spread widened Wednesday, it’s still notably tighter relative to when the dealer survey was released in October

Jefferies (Thomas Simons, Aneta Markowska)

• Treasury’s refunding announcement reinforces skepticism that a buyback program would ever see the light of day and if it did, it’s doubtful it would be ready before 2H 2023
• Buybacks are “no simple fix” to liquidity problems in certain sectors of the Treasury market and would introduce a number of risks, including miscalibrating the size of buybacks and new issuance to fund them, as well as introducing moral hazard
• Liquidity management role is better suited for the Fed, who could buy and sell out of the SOMA portfolio to manage the amount of supply across the yield curve on a more dynamic basis

Wells Fargo (NYSE:WFC) (Michael Schumacher, Michael Pugliese)

• Expects a Treasury buyback program will be coming in the first half of 2023
• “Issuing more T-bills to buy short-dated off-the-run coupon securities would provide a triple benefit in our view,” they wrote. “It would help Treasury smooth T-bill supply in the face of debt ceiling constraints, it would take advantage of an opportunity to buy ‘cheap’ securities and issue ‘rich’ ones, and it would help improve Treasury market liquidity via cleaner dealer balance sheets”
• The pros of the buybacks outweigh the cons and Treasury’s debt-management strategy of being regular and predictable will lead officials to take their time to ensure a smooth rollout

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