JPMorgan warned Friday that the U.S. Treasury's expanded bond buyback program may provide only temporary relief while leaving the country's debt problem unresolved.
James Sullivan, JPMorgan's co-head of global fundamental research, told CNBC that the Treasury is buying back longer-duration bonds while issuing shorter-dated bills — a maturity swap that does not reduce the total debt load. "It's a little bit like paying your mortgage with your credit card. It can work for a while, but eventually the mismatch starts to become more obvious," Sullivan said.
The Treasury announced Wednesday it would at least double the size of its government debt buybacks, raising the per-operation ceiling from $2 billion to at least $4 billion for securities in the 10-to-20-year and 20-to-30-year sectors, with the enlarged operations running from Sept. 9 through Nov. 4. Treasury Secretary Scott Bessent said Thursday the program could be expanded further still, adding that the ceiling "could be more than the $4 billion per issue" depending on market conditions.
For Sullivan, the deeper issue the buyback program leaves untouched is a vast and expanding pile of government and corporate debt that markets must absorb. His figures included approximately $40 trillion in U.S. government debt and about $76 trillion when tallied across developed-market governments worldwide. "Governments trying to control markets is not a particularly attractive story most of the time," he told CNBC.
Foreign demand for U.S. government debt has weakened markedly: China's Treasury holdings have fallen to an 18-year low, and custody holdings that the U.S. Treasury manages on behalf of foreign governments have slipped to their lowest level in 14 years. That pullback by traditional buyers means more supply must clear at higher yields. "The only way you balance supply and demand is through price," Sullivan said.
Corporate borrowing is adding to the pressure. AI heavyweights have together sold $200 billion worth of bonds this year, an 80% jump from the prior year, with spending on data centers and other infrastructure driving the surge. That competition for capital is broadening the supply-demand challenge beyond government debt.
The implications extend to equities. According to JPMorgan data, the yield on bonds has climbed past the S&P 500's earnings yield, a crossover that muddies the calculus for investors deciding how to split capital between fixed income and equities. "The asset allocation decision becomes significantly more complex going forward as we see these environments play out," Sullivan said.