Why Treasury’s $6 billion bond buyback didn’t lower mortgage rates

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The Treasury Department's $6 billion bond buyback, an effort to stem rising yields, fell far short of expectations Thursday. The repurchase of government debt led to Treasury yields continuing to climb, with the 10-year note topping a three-year high. Potential home buyers and refinancers hoping for some mortgage rate relief instead saw rates creep toward, and in some reports, top 7%.

Yields were mixed Friday, with the 10-year Treasury remaining just below 5%.

In an interview Thursday evening with conservative strategist Steve Bannon on "War Room," Treasury Secretary Scott Bessent disputed the talk that the buyback program failed.

"This whole nonsense today that our operation didn't work — well, our operation didn't work, because we only had $10 billion of offers for our buyback program," Bessent said. "Normally, we get $20 billion, and we only buy the bonds back cheap. People seem to want to keep their long-term bonds, because we only had half as many offers. So, it's a bunch of noise, and in my career, I made money ignoring the noise."

Read more: What is the 10-year Treasury note, and how does it affect your finances?

Why the bond buyback didn't move mortgage rates

The bond market and mortgage rates are interconnected. By repurchasing government debt, the hope was to ease ever-higher bond yields and give mortgage rates some room to move lower.

That didn't immediately happen. Freddie Mac reported 30-year fixed mortgage rates moving higher to 6.76% for the week ending Wednesday, while Mortgage News Daily's more recent survey of lenders found rates already above 7%.

Matthew Graham, editor of Mortgage News Daily, attributed the increase not to Thursday's bond market reaction but to a surge in oil prices and the latest Producer Price Index, which he described as "poorly received."

"Even though Treasury buybacks ultimately imply more Treasury sales, they can temporarily boost demand and put downward pressure on rates," Graham wrote. "If the buyback amount is lower than expected, that means less demand than expected and higher rates, all else equal."

Read more: How soaring Treasury yields could hit your finances

A 'commendable' effort to ease home affordability issues

Anthony Chan, former chief economist for J.P. Morgan Chase, called Bessent's goal worthwhile.

"Although the U.S. Treasury Secretary's goal is commendable, namely, to push long-term Treasury yields, such as the 10-year note, lower to bring down U.S. 30-year mortgage rates. Not only to help with the midterm elections but also to help struggling households with home affordability problems," Chan said in an email to Yahoo Finance. "The problem is that the outcome has been as successful as Wile E. Coyote's efforts to capture the Road Runner."

In an August analysis on his Substack, Chan said the bond market is reflecting the government's resistance to lowering federal debt.

"Unless we come up with a game plan to eliminate our $2.1 trillion federal budget deficit, simple fiscal consolidation, which means patting ourselves on the back if we reduce it slightly to $2.0 trillion or even $1.5 trillion, is not going to cut it," Chan wrote.

Instead, Chan said, ideas are being floated that will add to the deficit rather than reduce it, pointing to President Trump's promise to issue a $5,000 check to every adult if the Republicans win both the House and the Senate.

"That will not even lead to fiscal consolidation. Instead, it will boost the deficit by $1.2 to $1.35 trillion on top of the $2.1 trillion deficit we have today," Chan said.

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best mortgage rates## Mortgage rates are reacting to continuing inflation

Chan believes mortgage rates pushing to 7% reflect stubborn inflation. With the Fed poised to raise short-term interest rates by a quarter point next week, 10-year Treasury yields, a benchmark for mortgage rates, are likely to remain elevated.

"The spread between the average 30-year mortgage rate and the 10-year U.S. Treasury yield has averaged close to 200 basis points over the past year, which means a rise in the 10-year Treasury yield usually translates into a proportional rise in the average 30-year U.S. mortgage rate unless that spread compresses," Chan said.

Read more: Mortgage rate predictions for the next 5 years

Bessent: Bond yields are correlated to energy prices

The Treasury Department will buy back at least $4 billion more in 20- to 30-year bonds in two weeks. Secretary Bessent said his continued efforts to calm the bond market are not due to mid-term elections but to prevent economic issues in the U.S. due to the war in Iran.

"The Iranians … are trying to create economic problems in the US. So, my job, as someone operating during a conflict like this, is to ensure that the markets are stable," Bessent said in the Bannon interview.

"Look, if some of the Bloomberg terminal bros are unhappy with what I'm doing, well, that's too bad. Bond yields have never been more correlated to the energy price, and that's my point here. We have a supply shock, and we will get to the other side of this."