Goldman Sachs Says Treasury Buybacks Won't Be Enough To Tame Bond Yields

• The Treasury's bond buyback is failing to reassure investors as long-term yields remain elevated.
• Goldman Sachs says changing how the Treasury borrows won't solve what's driving yields higher.
• Persistent deficits, AI spending, and strong growth are keeping bond yields elevated, Goldman says.

The Treasury's plan to buy back more long-dated government bonds has done little to calm the bond market.

Treasury yields remained elevated after Treasury Secretary Scott Bessent said the department would repurchase up to $6 billion of 10- to 20-year debt, despite hopes the move would ease pressure on long-term borrowing costs following a broad bond selloff.

On Wednesday, the benchmark 10-year Treasury yield was around 4.85%, near its highest level since October 2023. The 20-year and 30-year yields traded at about 5.3%.

The issue extends beyond the US. Changing how governments issue debt is unlikely to materially lower long-term yields, according to Goldman Sachs in a Wednesday post.

According to Goldman, changing what kind of debt the Treasury sells doesn't change how much money the government needs to borrow.

According to the bank, changing what kind of debt governments sell doesn't change how much they need to borrow.

"What's really interesting about this move higher in yields is how orderly it's been," George Cole, head of European rates strategy in the global macro and markets research group, said in a webinar.

He added that subdued volatility makes it difficult to argue the bond market is "fundamentally mispriced."

Goldman argues investors are repricing bonds based on fundamentals rather than market dysfunction.

Those fundamentals include widening fiscal deficits across developed economies, resilient economic data, and a surge in borrowing to finance AI investment, which Goldman estimates could amount to about 1% of global GDP.

Some of those pressures may ease. Goldman expects energy-driven inflation concerns to fade over the next six months, while greater clarity on returns from AI investment could ease some of the pressure on bond markets from AI-related borrowing.

"But what won't go away is the fiscal concerns," Cole said.

The US is not alone. Governments in the UK and Japan have similarly reduced issuance of longer-dated debt as demand for duration has weakened, but the bank sees little evidence that such issuance changes can materially lower long-term yields.

Instead, Goldman expects investors to continue demanding higher yields on long-term government bonds as fiscal concerns persist.

"If a view of fundamentals has carried us higher, you need a shift in fundamentals to bring us lower," Cole said.