On Monday, long-term US Treasury yields retreated across the board, with 10-year and 30-year yields falling more than 3 basis points. Reports indicate the US Treasury may tap its General Account (TGA), which holds close to $1 trillion, to fund the recently announced expanded bond repurchase program, easing some of the anxiety sparked by the earlier selling wave. Meanwhile, bond market volatility has also heightened uncertainty around the monetary policy outlook, putting greater scrutiny on Federal Reserve Chair Kevin Warsh's Jackson Hole debut this Friday.

Reserve Funds for Market Support Are Plentiful

Media reports on Monday, citing two senior US Treasury officials, said the department can draw on the TGA account—worth close to $1 trillion—to support the expanded bond buyback program announced recently. Bessent previously described this operation as a "Treasury Twist," a concept derived from a type of government or Fed maneuver: buying long-term bonds while funding the purchases through short-term debt issuance, implying the Treasury had originally planned to sell short-term securities to raise capital.

On August 19, the US Treasury made a blockbuster announcement: doubling the single-repurchase size for long-dated off-the-run bonds from $2 billion to at least $40 billion. Treasury Secretary Bessent later revealed the actual repurchase scale could even exceed this new minimum threshold. However, the Treasury did not specify where the buyback funds would come from, and after the surprise announcement, the bond market reversed its initial rally and weakened. Part of the reason is that many market analysts questioned the effectiveness of the operation while worrying about the limited scale of funds the Treasury could deploy.

The TGA is essentially a checking account the US government maintains at the Federal Reserve, functioning as an emergency reserve funded by collected tax revenue. Data shows Bessent has pushed the TGA balance to roughly $950 billion since taking office, compared to a target range of $550–600 billion set during the Biden administration. Officials did not reveal how much of the TGA would be deployed or when an announcement might be made.

Notably, the TGA account size has flexibility for adjustment. During Yellen's tenure at the Treasury, the goal was set to maintain a balance covering "one week of cash needs." If TGA funds are used and the Bessent administration wants to sustain the near-$1 trillion account size, the Treasury would need to issue more bonds to replenish the account. Moderately lowering the TGA balance does not appear to pose immediate risks in the short term.

A lower TGA balance means that if a debt ceiling standoff erupts again, the government would have less cash on hand. Latest estimates suggest the US would not hit the new debt ceiling until next winter, possibly even early spring, giving the Treasury ample time to refill the TGA as needed. Meanwhile, even a small-scale TGA drawdown—or merely creating market expectations that the Treasury will use TGA funds to buy bonds—would be enough to influence bond yields. This could also dispel concerns among some bond market participants who previously worried the Treasury might ask the Fed to assist with repurchase operations.

Bessent gave no further signals on Monday about adjusting the US debt management approach. When asked at a press conference whether repurchases would expand soon, he said, "We haven't even bought a single bond yet," adding that the Treasury will "continue with the regular issuance calendar." No changes will be made until the next quarterly refunding announcement in early November.

While Bessent deploys various tools at the Treasury's disposal to curb rising bond yields, traders on major prediction platforms believe these measures are unlikely to drive a significant decline in Treasury yields. On Kalshi, the probability of the 10-year yield reaching or exceeding 4.75% by year-end stands at 56%; however, they estimate the chance of the yield breaking above 5% by year-end at just 27%. On Polymarket, the probability that the 10-year yield will breach 4.8% at some point this year is two-thirds. Even after the recent bond selloff, that level has not yet been touched.

Markets are closely assessing upside inflation risks, combined with the unresolved US-Iran conflict and the US total debt surpassing $40 trillion for the first time, all adding upward pressure on domestic yields.

How Will Warsh Respond

This week's annual global central bank symposium in Jackson Hole, Wyoming, is drawing intense media attention, as it has long been a key platform for Fed leaders to set policy tone and deliver critical signals. Former Chair Powell, for example, unveiled a new monetary policy framework there, issued a brief but forceful anti-inflation stance, and cemented market expectations for consecutive rapid rate hikes.

According to the schedule, Fed Chair Kevin Warsh will deliver his first speech since taking office at this conference on Friday. Traders and analysts are eager to find clues in the remarks about the recent jump in bond yields, while also hoping for assurances that the Fed remains independent from the Trump administration—making this speech particularly consequential.

Adam Posen, president of the Peterson Institute for International Economics, said both the bond market and the FOMC have clearly woken up to the reality of high inflation and the upcoming trend of structurally higher rates. Posen noted that Warsh left numerous open questions at his post-meeting press conference last month; the Fed chair should not dwell too much on long-term visions but focus on the present: how the Fed assesses the current economy and the impact of the latest global market developments. "He should clearly state: 'I've been following the data, listening to the market as promised, and taking in the committee's views. If economic data doesn't improve going forward, there are indeed reasons to consider rate hikes in the coming months,'" Posen said.

Since the July 28–29 FOMC meeting, the macro picture has become more complicated. The sharp rise in US and global bond yields, combined with Treasury Secretary Scott Bessent's direct intervention in the bond market, means Warsh must confront a Treasury that is more proactively intervening in markets, along with rising government debt financing costs. Theoretically, as long as government financing is not in distress and Treasury operations do not disrupt short-term rates, these issues should fall outside the Fed's purview. The Fed's core policy tool is the overnight policy rate. Any gap between overnight rates and short-term Treasury yields would complicate the Fed's rate management.

Over the past month, the dollar has weakened steadily against major currencies, and a depreciating dollar could further fuel inflation. Krishna Guha, a former New York Fed official and current vice chairman of Evercore ISI, wrote: "We've entered a new regime where the Treasury's aggressive policy—for better or worse—carries as much weight as central bank monetary policy; the interaction between these two institutions will determine the future macro outlook. Warsh has articulated an unconventional view: the Fed should step back and let the market shape the yield curve... while hinting that tightening at the long end would be preferable to raising short-term rates. But when investors see Bessent actively managing the long end, that logic becomes hard to reconcile."

Maurice Obstfeld, former chief economist at the International Monetary Fund and professor at UC Berkeley, believes the bond market's moves are reflecting these concerns. "The US is heading into midterm elections, whose outcome could reshape the second half of Trump's second term. With the bond market in turmoil, Warsh is clearly still finding his footing in a highly tense environment. The market is asking: what will the Fed do about inflation running persistently above target? Inflation pressures could indeed force larger rate hikes in the future—that's part of what's driving long-end yields higher," Obstfeld said. He added that this week's speech is an ideal window for Warsh to clarify his policy thinking.