Bessent Put Narrows 30-Year Swap Spread to February Low

Treasury Secretary Scott Bessent's plan to at least double long-dated buybacks has narrowed the 30-year swap spread to its lowest since February, as traders price a government backstop for the long end of the curve.

"The new Treasury 'put' improves the asymmetry of owning the long end by providing a potential light backstop," said Jason Williams, head of US rates strategy at Citi.

The 10-year swap spread has also compressed, by about 3 basis points to roughly 38 basis points, while the 30-year yield sits near 5.2 percent, close to its highest since 2007. The 10-year yield holds above 4.6 percent, near levels last seen in early 2025.

Even so, structural forces — a widening US budget deficit and heavy debt issuance — keep long-end yields elevated, and Wall Street strategists argue buybacks alone cannot reverse the trend. The Jackson Hole Symposium on Friday gives Fed Chair Kevin Warsh a chance to weigh in, while Wednesday's PCE inflation data will test whether the Fed can hold rates steady in September.

The buyback expansion, announced last week, has already moved markets. The 30-year swap spread has tightened by about 6 basis points in cumulative terms since the announcement, according to Padhraic Garvey, regional head of research at ING Groep NV. "The absolute level of Treasury yields is of course relevant, but is only part of the story," Garvey said, noting the narrowing reflects expectations that buybacks could be increased again.

CNBC reported Monday that the Treasury could use its cash pile at the Federal Reserve — the Treasury General Account — to finance the expanded purchases, giving the market a further boost alongside a drop in crude oil prices.

Options Market Shows Bullish Tilt on Long End

The options market reflects the same dynamic. There has been a bullish tilt in the past week, with calls relative to puts on long-maturity Treasury futures rising sharply, while skews for shorter-maturity futures stayed near neutral. "The current 'play' is in long end, and current fear, if you can call it that, is that long rates might plunge due to intervention," said Alex Manzara, a derivatives broker at R.J. O'Brien & Associates.

In SOFR options, open interest surged at the 96.0625 strike across September, December and March contracts, concentrated in puts. Across the four most populated strikes, open interest in September and December calls was more than twice as large as in puts.

Investor positioning is diverging. JPMorgan's Treasury client survey on Aug. 24 showed neutral positions fell to 54 percent, the fewest since May 26, from 67 percent, as traders took sides on whether the "Bessent put" will hold.

Structural Pressures Keep Long-End Yields Elevated

Skeptics argue the intervention does not fix the underlying supply-demand imbalance. "While conducting buybacks at the long-end of the yield curve may technically decrease yields, a fundamental reason why Treasury yields are higher — notably higher structural US budget deficits, which requires a significant supply of Treasuries to finance the US debt — is not changing anytime soon," said Libby Cantrill, head of public policy at Pimco. Billionaire investor Stanley Druckenmiller has publicly criticized the intervention as a mistake.

Goldman Sachs strategists George Cole and William Marshall wrote in an Aug. 21 report that increasing long-end buybacks does not address the main driver of recent long-term yield volatility. A team led by Wells Fargo's Erik Nelson said sustained lower yields would require slower growth and inflation, reduced Fed balance-sheet uncertainty, fiscal consolidation, or a slowdown in investment-grade issuance.

The Fed's own research shows hedge fund exposure to the basis trade — betting on swap spread direction — reached a record $305 billion last year, up from less than $50 billion in 2022, making the market more sensitive to policy shifts.

If the buyback program continues to compress swap spreads, duration-heavy investors stand to benefit in the near term. But with the 10-year yield near 4.7 percent and the 30-year near 5.2 percent, the structural deficit keeps long-end yields elevated. Wednesday's PCE data and Friday's Jackson Hole remarks will shape whether the Fed can hold rates steady in September, with the carry spread between fed funds and the 2-year yield below 60 basis points.

This article is for informational purposes only and does not constitute investment advice.