US Treasuries Are Heading Toward a Dangerous Turning Point

On 19 August 2026, the US Treasury announced it would double the scale of its buybacks of long-dated Treasury securities — from $2 billion per operation to at least $4 billion — targeting maturities between ten and thirty years, with the program running from 9 September to 4 November.

Treasury Secretary Scott Bessent subsequently described the move in a CNBC interview as a “Treasury Twist.”

Anyone with even a passing familiarity with the US economy will recognize what Bessent was borrowing from: the Federal Reserve’s Operation Twist.

Operation Twist is an unconventional monetary policy tool in which the central bank sells short-dated Treasuries and buys long-dated ones, pushing long-term interest rates lower without expanding its balance sheet.

The Fed has employed it twice in its history.

The first time was in 1961. Facing a recession, a balance-of-payments deficit, and the risk of gold outflows, the Fed implemented the strategy for the first time at the urging of the Kennedy administration, buying long-dated bonds and selling short ones to hold long-term rates down. That episode is now 65 years behind us, and the international monetary system at the time was Bretton Woods — a framework so different from today’s global environment that its lessons for the present are limited.

The second time was in 2011. After the 2008 global financial crisis, the Fed had cut its benchmark rate sharply, yet the US economy remained sluggish. In response, it turned to quantitative easing (QE), purchasing large volumes of long-dated bonds to push long-term rates lower. Two rounds of QE followed — beginning in November 2008 and November 2010. In September 2011, the Fed announced an Operation Twist: it would buy long-dated Treasuries with maturities of six to thirty years while simultaneously selling an equivalent amount of short-dated paper maturing in three years or less, for a total of roughly $400 billion.

Compared against the Fed’s Operation Twist, what Bessent is proposing is to lead the Treasury into a more hands-on role in managing the government bond market.

In a market of more than $31 trillion, $4 billion per operation is genuinely a rounding error, and moves of that scale would have difficulty shifting market prices in any significant way.

So why did Bessent’s announcement attract such intense scrutiny?

The fundamental answer lies in the Treasury’s structural position. As the sole supplier in the primary market for US government debt, it already commands considerable influence. If it now uses that unique position to actively play against the other participants in the market, the result could be a structural change to the US Treasury market as a whole. And what follows from that could be an outcome in which everyone loses — at which point the question of whether US Treasuries can still serve, unquestionably, as the bedrock of global financial markets would no longer have an obvious answer.

This is clearly not a small matter.

A Political Decision

Modern economies have grown extraordinarily complex, which is why we rely on technocrats to run much of the detailed work of regulation. Whether those technocrats can hold their ground under political pressure and make the professional judgments their own expertise tells them to make is, however, still an open question — at least in the United States.

The clearest illustration of this is the Federal Reserve’s independence.

The Fed’s conflicts with the White House, and its struggle to maintain its own autonomy, run through the institution’s entire history.

A particularly telling example is Marriner Eccles, who became Fed chairman in 1934 and served until 1948 — a tenure that spans the whole of the Second World War. During the war, given the extraordinary circumstances, the Fed took its orders from the Treasury and surrendered its independence unconditionally. As a central bank, it had one overriding watchword: low rates. Long-term government bond yields were held at a steady 2.5 percent throughout the war; short-term paper was kept below 0.5 percent. That arrangement made it easier for the government to finance the war, but the price was relentless inflation.

After the war, Eccles repeatedly pressed for tighter monetary policy while the Treasury insisted on keeping conditions loose. The friction between them escalated to the point where Eccles hinted that if the White House and the Treasury continued to block him, he and other Fed officials would stage a sit-in in protest. Because he kept defying the White House, President Harry Truman decided not to reappoint him as Fed chairman.

Eccles was out, but his colleagues carried on the fight for the Fed’s independence. Truman eventually had to compromise, agreeing to bring the Treasury and the Fed to the table to negotiate a resolution. The result, in March 1951, was the Treasury-Fed Accord — an agreement that secured a measure of independence for the Fed and is widely regarded as the founding moment of the modern Fed’s institutional autonomy.

Those who know the Fed’s history, though, will also know that the White House continued to exert obvious influence over the institution for decades afterward. In 1965, for instance, President Lyndon Johnson summoned then-Fed chairman William McChesney Martin Jr. to his Texas ranch and berated him face to face: “My boys are fighting in Vietnam, and you want to raise rates?” And then: “Who’s running this country — you or me?”

It was not until the 1980s that the Fed’s independence gradually became a broad consensus.

Now Donald Trump has arrived, openly rejecting that consensus and repeatedly using various means to pressure the Fed to cut rates.

If even the Federal Reserve faces this dynamic, the Treasury — a department of the federal government — has considerably more reason to fall in line with what its boss wants.

The United States runs on electoral politics, and congressional midterm elections are coming in November. Republicans currently hold slim majorities in both the House and the Senate, and polling now shows the party facing a very difficult environment. In late February, the Trump administration joined Israel in striking Iran; rather than surrendering, Iran responded by closing the Strait of Hormuz, which drove global oil prices sharply higher. Add to this the fact that US inflation has now exceeded the Fed’s 2 percent target for five consecutive years, and the Fed not only dares not cut but may actually have to raise rates.

If the Fed hikes, Treasury yields will rise, and with them the mortgage and credit card rates that bear directly on the daily lives of ordinary Americans. A significant share of the electorate will direct their anger at Trump and the Republicans. If the Democrats were to take control of both chambers, Trump’s position would become far more difficult — and that is precisely why the administration is doing everything it can to bring rates down quickly.

With the Fed ignoring Trump’s calls for cuts, Bessent has devised his own answer: the “Treasury Twist,” which is essentially a form of QE for government debt. The difference is that the Treasury cannot create money, so the Twist cannot be scaled up quickly the way QE can. But if long-term Treasury yields fall, the rates on the wide range of financial products priced off them will also fall — an outcome that clearly benefits the Republican Party.

Wave after wave of criticism followed Bessent’s announcement almost immediately. The people at the Treasury understand the logic and the risks perfectly well. But this is a political decision. Politicians reason differently from technocrats, which is why political factors so often appear at the root of economic crises.

Seen in that light, Bessent’s “Treasury Twist” carries enormous risk from the moment of its conception.

“Regular and Predictable”

Bessent’s Twist is modest in scale. What it threatens is something larger: the foundational principle that has governed US debt management for decades — “regular and predictable.”

Let me explain what this means.

“Regular and predictable” is the core principle the US Treasury has long followed in managing government debt. Its purpose is to reduce the shock that sudden policy shifts inflict on financial markets, by keeping the issuance schedule transparent and fixed.

The principle has three essential components:

❶ Transparency. The Treasury publishes its issuance plans and volumes on a fixed cycle, and does not carry out major financing operations outside that regular schedule.

❷ Stable expectations. By enabling global investors to anticipate the shape of Treasury supply across all relevant dimensions in advance, the principle reduces the risk of panic or violent market swings caused by information asymmetry.

❸ Lower borrowing costs. A high degree of predictability strengthens investors’ confidence to buy, helping the US government borrow steadily over the long run at lower interest rates.

“Regular and predictable” did not emerge as a principle derived from theory. It was distilled from hard experience and many painful lessons.

In the 1970s, the Treasury operated on a market-timing philosophy: when conditions were favorable, it issued more debt; when they were not, it issued less. That approach injected enormous uncertainty into the market.

Kenneth Garbade, historian at the Federal Reserve Bank of New York, records that in March 1975, the Treasury auctioned $1.25 billion of 15-year bonds. At the same time, a banking syndicate brought $600 million of AAA-rated corporate bonds from a prominent American company to market. According to press reports at the time, the two simultaneous offerings threw the bond market into “chaos.”

By the early 1980s, market-timing had been abandoned and “regular and predictable” had emerged as the consensus. It has held to this day.

Any erosion, however slight, in the standing of US Treasuries hands an enormous opportunity to competitors — gold and bitcoin among them

The subject calls to mind a memory of my own. When I first went to teach at Duke University’s business school in the 1990s, a finance professor there published an article in The Wall Street Journal on exactly this topic. Short-term Treasury rates were low at the time and long-term rates were high, so he argued that the Treasury should issue more short-dated debt and less long-dated debt to cut its interest bill.

I took a different view, and the core of my argument was this:

The Treasury is the monopoly issuer of government debt. It operates at a scale that precludes it from playing games with the market. The moment it starts timing the market, risk rises across the board, and investors will respond by demanding that the government pay a higher interest premium. In other words, the market-timing instinct is penny-wise and pound-foolish.

What This Means for the Market

“Regular and predictable” is hard-won, the product of many people’s accumulated judgment. Bessent does not appear to share it.

There is an irony worth noting: before becoming Treasury Secretary, Bessent was a prominent hedge fund investor. For a hedge fund, exploiting the yield differential between Treasuries of different maturities is a perfectly normal trade. But that logic does not transfer when the person making the trade is the Treasury Secretary.

The reason is straightforward: the Treasury monopolizes the issuance of government debt. If it sets out to “manipulate” the market it controls, risk in that market rises. Investors demand higher yields in return. Over the long run, the loser will certainly be the Treasury and the US government bond market.

The question now is: if Bessent and those directing him insist on abandoning “regular and predictable” and returning to a market-timing approach, what changes in the market? In my view, at least three significant consequences would follow.

First, US Treasury yields would rise. The US government’s borrowing costs would increase, and with them the yields on the wide range of financial products benchmarked against Treasuries. None of this would be good news for the US economy.

Second, any policy that can expand demand for Treasuries — especially short-dated Treasuries — is likely to be pursued with considerably more force from here. Stablecoins are the obvious example. Under the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins), the qualifying reserve assets a stablecoin issuer may hold are limited to a narrow set of very short-dated, highly liquid dollar instruments — among them Treasury bills with 93 days or less remaining to maturity. From the Treasury’s perspective, the growth of the stablecoin sector would straightforwardly support demand in the short-dated Treasury market. It may be that now is a good time to enter the stablecoin business.

Third, demand for other assets may increase. For decades, US Treasuries have served as the ballast of global financial markets. According to data from the Securities Industry and Financial Markets Association (SIFMA), average daily trading volume in US Treasuries currently runs to $1.2 trillion — a depth of liquidity that no other financial instrument can match.

The reasons the Treasury market grew into what it is today are complex, but the Treasury’s “regular and predictable” management approach deserves significant credit. Perhaps because it has functioned without interruption for so long, people have begun to take it for granted — which is how it becomes possible, under short-term political pressure, for someone to want to discard a rule that should not be touched.

One man’s poison is another man’s honey.

Any erosion, however slight, in the standing of US Treasuries hands an enormous opportunity to competitors — gold and bitcoin among them.

In developed economies and emerging markets alike, government bonds sit at the center of the financial system. The key to a well-functioning government bond market is letting the market lead, with government playing the role of night watchman and little more. Only then does the risk of unexpected interference from the government side fall to a minimum, and only then can a government finance itself at the lowest possible cost over the long run.

A government bond market that works this way is precious. It deserves to be protected by everyone who participates in it.

This article was originally published in Caixin.