Solutions Economic and Market Watch

Join Antony Davies, director of economic research at CFC, as he explores why the Treasury is buying long-term bonds, what that means for interest rates and borrowers, and why efforts to suppress market signals may create larger problems down the road.
Contact the Economic & Market Watch team at economicresearch@nrucfc.coop. 
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Antony Davies
Antony Davies is director of economic research at CFC. Visit his full bio at https://www.nrucfc.coop/content/solutions/en/author/antony-davies.html for more.

What is Solutions Economic and Market Watch?

Listen to the latest economic insights from CFC experts John Suter, Sam Kem, and Antony Davies.

Antony Davies:

Welcome to the Economic and Market Watch podcast for the week of August 31, 2026. This is Antony Davies.

Antony Davies:

Following a decade of rock bottom inflation and interest rates, the COVID stimulus ignited the 2022 inflation. To fight the inflation, the Fed gave us "higher for longer" interest rates. To shave the last stubborn percentage point from inflation, this year the Fed followed up with "much higher for much longer" interest rates.

Antony Davies:

In focusing on inflation, the Fed has allowed the ten-year Treasury yield to rise steadily since March and the thirty-year yield to reach its highest level since 2007. Displeased with the high interest rates, Secretary of the Treasury Scott Bessent is stepping in.

Antony Davies:

Bessent recently directed the Treasury to increase its purchases of long-term Treasuries from a maximum of $2 billion to a minimum of $4 billion every five days or so. Bond prices and yields move in opposite directions.

Antony Davies:

So when the Treasury buys long-term bonds, it puts upward pressure on their prices and downward pressure on their yields. And lower long-term yields typically lead to lower mortgage rates and lower borrowing costs for businesses, which lead to happier households and economic growth. But something here should concern us. It emerges when we ask where the Treasury is getting the money to buy those long-term bonds.

Antony Davies:

The federal government doesn't have a surplus of money, so in the same way that a cash-strapped household might use a lower interest rate loan to pay off a higher interest rate credit card, the government is issuing short-term debt to raise the money it needs to pay back some of its long-term debt.

Antony Davies:

And that means that whatever downward pressure we get on long-term yields will come with upward pressure on short-term yields. This is called "flattening the yield curve."

Antony Davies:

And it comes at another cost also: refinancing risk.

Antony Davies:

Treasury is taking debt it wouldn't have had to refinance for decades and transforming it into debt it may have to refinance again in a year or even a few months.

Antony Davies:

It's like swapping your thirty-year fixed-rate mortgage for a variable-rate mortgage. It's great while short term rates are low, but every time short term rates tick up, you run the risk of them exceeding the fixed rate you gave up.

Antony Davies:

The larger the loan, the greater is the refinancing risk, and the government's $40 trillion debt creates an astronomical refinancing risk. With around 20% of the government's debt in short-term Treasuries, an interest rate increase of just one basis point -- that's one one hundredth of one percentage point -- costs the government an additional billion dollars a year. Pressed on the reasoning behind the buybacks, secretary Bessent said he believes that, quote, "yields don't reflect underlying fundamentals."

Antony Davies:

That's a disturbing take because market yields by definition reflect participants' views of the underlying fundamentals.

Antony Davies:

Perhaps what the secretary means is that yields don't reflect the views he would prefer market participants to hold, and that's dangerous.

Antony Davies:

The Fed must be independent so that it can enact needed monetary policy regardless of how unpopular that policy may be. But Fed independence matters little if Treasury discovers that it can move rates itself. We end up with a Treasury that can use its debt-management powers to counter Fed policy. Long-term rates are sending a signal that Bessent doesn't like. Rather than address what is producing the signal, Bessent is trying to change the signal.

Antony Davies:

It's like disconnecting your car's check-engine light. You can shut the light off, but that doesn't mean the problem has gone away.

Antony Davies:

The important question is why investors are demanding higher yields in the first place. A large part of the answer is runaway government borrowing.

Antony Davies:

Treasury can change which bonds the government owes. It can change when those bonds mature. It can even influence temporarily where along the yield curve investors feel the government's borrowing.

Antony Davies:

What it can't do is stop the borrowing. The federal debt is unsustainable, and the warning lights of Treasury yields and inflation have been flashing for some time. Flattening the yield curve and altering how we measure inflation are just different ways of shutting off the warning lights.

Antony Davies:

The fix is to bring federal spending under control. If history is any guide, that's unlikely to happen until we see smoke pouring out of the engine.

Antony Davies:

This is Antony Davies for the Economic and Market Watch podcast. Thank you for listening. Remember to download this week's Economic and Market Watch intelligence brief and dashboard.

Antony Davies:

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Antony Davies:

To share your interesting thoughts, contact us at economicresearch@nrucfc.coop.