After the "Bessant bailout," how far is the US from restarting QE?

Original title: Did Bessent 'Put' Us Back On The Road To QE?
Original author: The Heisenberg Report
Translation by: Peggy

Editor's Note: On August 19, the U.S. Treasury announced an expansion of its long-term Treasury liquidity support repurchase agreements, increasing the maximum repurchase size for 10-20 year and 20-30 year nominal interest-bearing Treasury bonds from $2 billion to at least $4 billion. The new arrangement will take effect on September 9. Before the announcement, the yield on 30-year U.S. Treasury bonds rose to approximately 5.34%, reaching its highest level since 2007; after the announcement, long-term yields briefly fell back.

$4 billion is not a large sum relative to the over $30 trillion U.S. Treasury market, and repurchase agreements are not equivalent to quantitative easing. What truly sparked market discussion was the timing of the announcement: the Treasury had just completed its quarterly refinancing communications two weeks prior, yet suddenly increased the scale of long-term bond repurchases outside the regular window. This prompted investors to reassess the extent to which the Treasury is willing to actively intervene in the market when long-term yields rise rapidly.

The Heisenberg Report, citing the assessments of Charlie McElligott, cross-asset strategist at Nomura Securities, and Michael Every, strategist at Rabobank, interprets this move as a policy signal: the US government may be unwilling to allow long-term financing costs to continue rising, thereby constraining fiscal spending, geostrategic considerations, and private sector financing. This has led to the market coining the term "Bessent Put."

However, there is still a long way to go from expanding repurchase agreements to yield curve control, and even restarting quantitative easing. This article doesn't really discuss whether QE has returned, but rather whether the US policy response function is changing: if fiscal pressures, inflation, AI financing, and geopolitical conflicts continue to push up long-term interest rates, will the Treasury and the Federal Reserve be forced to take stronger measures?

The following is a translation of the original text:

After the U.S. Treasury expanded its long-term Treasury bond repurchase program, the market's first question was not about the scale, but rather two more direct questions: Why now? Does this mean that the U.S. government is beginning to set an implicit bottom line for long-term yields?

Some investors have dubbed this arrangement the "Bessent Put," while others have called it a "lighter version of QE" or a new "Operation Twist." These names are not official policy concepts, but rather market speculation about the Treasury's policy intentions.

On August 19, the U.S. Treasury Department announced that it would increase the size of its liquidity support repurchase agreements for 10-20 year and 20-30 year nominal interest-bearing Treasury securities from a maximum of $2 billion per transaction to a minimum of $4 billion. The Treasury's official reason was that long-term bond repurchase agreements were consistently receiving a large number of high-quality offers, thus necessitating stronger liquidity support for these maturities.

This explanation did not completely dispel market doubts. A single $4 billion repurchase is still limited, but prior to the announcement, long-term US Treasury bonds had just experienced a rapid sell-off, with the 30-year yield rising to approximately 5.34%. Therefore, investors were more concerned not with how much the Treasury actually bought, but with what signal it chose to send at this particular time.

$4 billion isn't a large sum; the unexpected announcement itself is more important.

Charlie McElligott, cross-asset strategist at Nomura Securities, believes the specific size of the repurchase is not the key factor. More importantly, Bessant seems to be telling the market that the US government cannot accept the continued out-of-control long-term Treasury market, and fiscal and monetary authorities may take a more proactive stance than before.

This is an analyst's interpretation of the policy intention, not the yield target confirmed by the Ministry of Finance. The Ministry of Finance officially defines this adjustment as "liquidity support," not as an attempt to lower long-term interest rates, and has not announced any support for a specific yield level.

However, the timing of the announcement fueled market speculation. The U.S. Treasury typically announces its bond issuance and debt management arrangements in a concentrated manner through quarterly refinancing announcements (QRAs). This adjustment, however, came only about two weeks after the previous QRA, and was suddenly released outside the usual communication window.

According to McElligott, this unusual timing suggests that the pressure on long-term bonds may be rising faster than policymakers had anticipated. The market therefore views the announcement as a "signal": the Treasury wants to prevent further deterioration in liquidity from amplifying long-term interest rate increases, rather than simply performing routine bond restructuring.

This assessment still requires caution. The decline in yields after the announcement only indicates that the market reacted immediately to the news, and does not prove that the Ministry of Finance has successfully lowered long-term financing costs. In fact, the subsequent renewed pressure on long-term bond yields also suggests that small-scale repurchases are insufficient to offset deeper factors such as the fiscal deficit, inflation, and bond supply.

Long-term debt pressure does not stem from a single variable.

The article argues that the repurchase is not simply due to a liquidity problem, but rather a combination of unfavorable factors simultaneously squeezing demand for long-term bonds.

First, there's the ever-expanding US fiscal deficit and the supply of Treasury bonds. When investors hold long-term bonds, they typically demand additional returns to compensate for risks associated with inflation, fiscal policy, and interest rate fluctuations; this return is known as the term premium. The chart cited in the original article shows that the model-estimated term premium for 10-year US Treasury bonds is approaching 80 basis points, roughly double the peak of the long-term bond sell-off in 2023.

Secondly, the construction of AI infrastructure is generating substantial corporate debt financing. Technology companies and data center operators need to raise funds for chips, power, and computing facilities, increasing the supply of corporate bonds and competing with US Treasury bonds for private sector balance sheets. McElligott summarizes this as a "crowding-out effect": when both Treasury bonds and corporate bonds are issued in large quantities simultaneously, there is a limit to the amount of long-term duration risk the market can absorb.

The Japanese factor has also added to the uncertainty. Japan is a major overseas holder of U.S. Treasury bonds, and the depreciation of the yen and its potential need for intervention have raised concerns that Japanese institutions may reduce their holdings of U.S. Treasury bonds to raise dollars. The article interprets the recent U.S. involvement in foreign exchange market coordination and the Treasury's expansion of long-term bond repurchase agreements within the same framework: policymakers may want to avoid a mutually reinforcing cycle between exchange rate intervention and the sale of U.S. Treasury bonds.

However, this remains a market interpretation. Public information confirms that the U.S. Treasury has expanded its long-term bond repurchase program, and pressures on long-term bonds, the yen, and corporate financing can be observed, but the Treasury has not provided a full explanation as to whether these factors directly constitute the cause of this policy adjustment.

"Bessant's bottoming-out expectation" points to a new policy response function.

What the market truly reprices is the policy response function of the US government.

The so-called policy response function refers to investors' assessment of what measures might be taken under what conditions, based on the past behavior of policymakers. If the market believes that the Treasury will increase repurchase operations, adjust bond issuance terms, or strengthen coordination with the Federal Reserve after long-term interest rates rise to a certain level, then investors may begin to price in such potential intervention in bond prices in advance.

"Bessent Put" is the market-driven expression of this expectation. It is not a formal policy, nor is it a promise by the Treasury to support the price of U.S. Treasury bonds. Rather, it refers to investors' speculation that Bessent may take more aggressive debt management measures when long-term yields threaten government financing, economic activity, or other policy objectives.

Michael Every further explained from a geostrategic perspective that the US government may be concerned not only with "lowering yields," but also with avoiding long-term financing costs that could constrain its foreign policy, especially given the ongoing tensions with Iran and rising risks to energy supplies.

Everyone believes that in the past, the United States could support its foreign actions by controlling financing conditions and key supply chains, but the current situation is more complex. The United States does not have complete control over the energy and related physical supply chains, and even if some crude oil can continue to be transported through the Strait of Hormuz, the supply of refined petroleum products may not be able to recover at the same time.

McElligott also raised a similar risk: if the situation in the Gulf escalates again, the impact could spread globally through refined oil products, manufacturing, and inflation. While crude oil inventories can be released, refining capacity and refined oil product supply cannot be quickly replenished simply by releasing inventories.

This means that policymakers may face two opposing pressures simultaneously: geopolitical conflicts driving up energy prices and inflation, requiring interest rates to remain relatively high; and fiscal financing and economic pressures, requiring long-term interest rates not to rise indefinitely. Expanding repurchase agreements may alleviate market liquidity, but it cannot eliminate this policy contradiction.

Repurchase agreements are not quantitative easing (QE); achieving yield control will require even greater shocks.

Does expanding Treasury bond repurchases mean the US has returned to quantitative easing? The original article suggests that it may have opened up this discussion, but it's too early to draw conclusions.

There is a fundamental difference between Treasury repurchase agreements and the Federal Reserve's quantitative easing (QE). Treasury repurchase agreements are primarily debt management operations, involving the repurchase of illiquid old bonds and the issuance of bonds with other maturities to improve market operations or adjust the debt structure. QE, on the other hand, involves the Federal Reserve purchasing assets on a large scale and injecting reserves into the banking system, directly expanding the central bank's balance sheet.

Therefore, a $4 billion liquidity repurchase cannot be directly called QE, nor is it sufficient to prove that the Treasury is implementing formal yield suppression.

McElligott believes this announcement is more like a "statement of intent," prompting further market discussion about the possibility of YCC or QE. YCC, or Yield Curve Control, refers to a central bank's commitment to purchase bonds to limit yields on a specific maturity to near a target level; LSAP, or Large-Scale Asset Purchase, is also a major form of quantitative easing.

However, he also emphasized that the market and economic environment must "deteriorate significantly" before these tools can truly become the next policy option. In other words, the "Bessant floor expectation" is currently changing investors' perception of policy boundaries, rather than indicating that the US has already launched a new round of QE.

What needs to be observed next is not only whether the Treasury continues to expand the scale of single repurchase operations, but also whether long-term yields can stabilize, whether term premiums will decline, whether the Treasury will further shorten the duration of bond issuance, and whether the Federal Reserve will cooperate in adjusting its balance sheet policy.

If these measures continue to escalate, market perceptions of "Ministry of Finance providing a safety net" and policy coordination will be strengthened; if long-term interest rates continue to rise under structural pressure, and the Ministry of Finance continues to limit repurchases to small-scale liquidity operations, then this announcement is more likely to be just a short-term attempt to stabilize the market, rather than the starting point for QE.