The U.S. Treasury’s plan for a 2024 regular buyback program is designed to help support liquidity in the government-debt market; however, it has been met with doubts by investment bank Jefferies Group. Since buybacks were first introduced in late 2022, Jefferies has consistently expressed skepticism that the program would have benefits that outweigh the costs and risks. As one of the two dozen primary dealers that act as trading counterparties of the Federal Reserve’s New York branch and help to implement monetary policy, Jefferies’ opinion carries weight in the conversation surrounding the buyback plans.
The Treasury’s buyback plan was first included in the department’s quarterly refunding announcement back in May of 2024, and it aimed to support market liquidity and ensure the smooth functioning of the Treasury’s auction process. The initial proposal was to begin regular buybacks in the third quarter of 2024, with schedules and amounts to be announced on a monthly basis. The Treasury’s aim was to improve market confidence and address the issue of a growing shortage of marketable securities available for settlement and collateral purposes due to central bank quantitative easing (QE) programs across the globe.
Although the buyback program looked promising at first, the situation changed after the events of the European debt crisis and the COVID-19 pandemic. These two factors have led to a sharp slowdown in global economic growth and continue to have lingering effects on global financial markets. Jefferies now argues that a buyback program in this environment would be unnecessary and could even be harmful.
According to Jefferies, there are three main issues with the buyback program:
1. No empirical evidence to support the program’s effectiveness
Jefferies U.S. economist Thomas Simons has stated that there is a lack of empirical evidence to support the idea that a buyback program would improve market liquidity and functioning. Adding to this point, Simons has argued that the Treasury’s reliance on dealer opinions to validate the policy is risky, as dealers may be biased due to their position in the market.
2. The program could remove high-quality collateral from the market
The Treasury’s buyback plans could unintentionally lead to a reduction in high-quality market collateral. This is because the program would effectively remove Treasury securities from the market, which are viewed as top-tier collateral for short-term funding needs. Reducing the availability of high-quality collateral could have negative effects on the repo market and other short-term funding markets, for example.
3. The risks of implementing a buyback program could outweigh the benefits
Jefferies is concerned that a buyback program could create distortions in price discovery and place unnecessary pressure on secondary market functioning. This is particularly important given how the Federal Reserve relies on primary dealers, such as Jefferies, to expedite its interest rate policies, and to keep the wider bond market functioning efficiently. Adding a buyback program to the mix, Jefferies asserts, could compromise the stability and effectiveness of the primary dealer system.
It’s worth noting that other factors are also at play in the Treasury’s decision-making process. One example is the ongoing discussion on the appropriate size of the Federal Reserve’s balance sheet, which could impact the amount of excess reserves in the banking system. Additionally, the Treasury has a clear need for short-term funding to finance its ongoing fiscal initiatives, such as the infrastructure spending package that was recently passed by Congress.
Taking all these considerations into account, it’s clear that the overall effectiveness of a buyback program is being called into question by industry players like Jefferies. This skepticism has led the Treasury to evaluate its planned buyback program in light of the potential risks involved, ultimately raising questions about whether it is both necessary and constructive.
However, it is important to keep in mind that views on the buyback topic do vary. Some argue that a buyback program could be a useful tool for managing the Treasury’s ever-growing debt burden, especially considering the low-interest rate environment in which we currently find ourselves. Expanding the Treasury’s toolkit to include a buyback program could provide it with additional flexibility to respond to shifts in market conditions, while also helping to ensure the smooth functioning of capital markets.
Ultimately, the Treasury will need to weigh the potential benefits and risks associated with the buyback program and make an informed decision on whether it is the right move. While Jefferies has clearly outlined its concerns, there remains a case to be made for implementing a buyback program as a way to improve liquidity and maintain market stability in the face of ongoing challenges facing the global economy.
