Please see below, an article from WH Ireland which discusses the potential options for managing the US government’s borrowing costs. Received today – 25/09/2026
Last week’s “Unpleasant Arithmetic” examined a difficult relationship. Higher interest rates help control inflation but increase government borrowing costs. Unless fiscal policy adjusts, a larger interest bill means more borrowing, making the problem worse.
But the government can influence that arithmetic. It cannot set the Federal Reserve’s policy rate. It can choose which maturities to borrow at and which outstanding bonds to buy back.
Earlier this month, the US Treasury announced an operation to purchase up to $6bn of bonds with ten to twenty years remaining. Combined with greater reliance on short-term Treasury bills, Scott Bessent’s modest programme resembles a miniature Operation Twist.
Under the Fed’s 2011 programme, the central bank sold shorter-dated securities and bought longer-dated government bonds. The aim was to reduce the long-term interest-rate risk investors had to hold, pushing longer-term yields down without expanding the Fed’s balance sheet.
Long-bond buybacks alongside shorter borrowing could have a similar effect. The distinction is that the Fed controls overnight rates, while investors set long-term yields.
Investors lending for thirty years demand compensation for uncertainty about inflation, government finances and future interest rates. The supply of bonds also affects the price they require.
Overnight rates work differently. The Fed chooses a target and supplies the reserves needed to keep market rates consistent with it.
When government borrowing draws money into its account at the Fed, payments can drain banking-system reserves. If that threatens to push overnight rates above target, the Fed must provide liquidity or adjust its operating tools. It can lend against securities or buy them outright.
Not every dollar issued requires Fed buying. Banks may hold enough reserves to absorb the drain without rates rising above target. Government spending also returns reserves to the system.
Nevertheless, shorter borrowing places more government financing near the rate the Fed maintains. Bill yields still reflect expected policy changes and market conditions, but the government avoids committing to the premium investors may demand for lending over decades.
Larger purchases of long-dated bonds could push their yields down. With fewer such bonds available, investors have less long-term interest-rate risk to absorb. Borrowing through bills avoids replacing all that risk.
Much depends on inflation.
Rising long-term yields suggest investors remain unconvinced that inflation will be brought durably under control. Stronger growth, heavier issuance, and fiscal uncertainty can also explain the rise. Higher yields alone cannot tell us which concern dominates.
If the Fed restores confidence in price stability while keeping short-term rates elevated, long-term yields could fall and the curve flatten. Larger buybacks could reinforce that move: investors become more confident about inflation just as fewer long bonds are available to buy.
Higher policy rates could therefore help lower long-term borrowing costs. That is the twist in last week’s arithmetic.
The amounts matter. Small buybacks may mainly improve trading in older securities. Buying back substantially more long-dated debt could have a wider effect on yields.
For investors, the opportunity is that the Fed succeeds in bringing inflation down while larger buybacks help lower long-term yields. Bondholders would gain, and the government could borrow for longer at a lower cost.
If inflation persists, however, greater reliance on short-term debt makes higher rates feed into the government’s interest bill faster.
Last week’s unpleasant arithmetic has not gone away. Bessent may be able to soften it, but he still needs the Fed to bring inflation under control.
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Alex Kitteringham
25th September 2026