JPMorgan Warns Treasury Buybacks May Delay, Rather Than Solve, U.S. Debt Market Pressures

The U.S. Treasury’s efforts to ease pressure in the government bond market may provide temporary relief but will not address the deeper problem of rapidly rising debt issuance, according to JPMorgan.

James Sullivan, JPMorgan’s co-head of global fundamental research, said the Treasury’s strategy of buying back longer-dated bonds while financing itself with shorter-term bills could help manage borrowing costs in the near term, but ultimately leaves the government’s underlying debt burden unchanged.

“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 told CNBC’s “Squawk Box” on Friday.

The Treasury Department, led by Secretary Scott Bessent, announced Wednesday that it would at least double the size of its government debt buybacks. The programme is scheduled to run from Sept. 9 through Nov. 4.

The buybacks are designed to improve liquidity and manage the supply of longer-maturity Treasury securities. By purchasing older, less-liquid bonds, the Treasury can influence the composition of outstanding debt while issuing more short-term bills to meet its financing needs.

Sullivan argues, however, that this does not eliminate the central challenge facing global bond markets: an enormous volume of government and corporate debt that must ultimately be absorbed by investors.

“The only way you balance supply and demand is through price,” he said.

In bond markets, that price adjustment is reflected largely through yields. If the supply of debt rises faster than investor demand, issuers generally have to offer higher yields to attract buyers. That creates a potential feedback loop for governments because higher yields increase the cost of servicing existing and newly issued debt.

The issue extends well beyond the United States. Sullivan pointed to roughly $40 trillion of U.S. government debt and about $76 trillion of government debt across developed markets, alongside record corporate bond issuance.

“Governments trying to control markets is not a particularly attractive story most of the time,” Sullivan said.

One of the concerns is that some traditional buyers of U.S. government debt are reducing their exposure. China’s Treasury holdings have fallen to an 18-year low, while U.S. Treasury custody holdings for foreign governments are at their lowest level in 14 years. That means the Treasury could face a more difficult funding environment as it competes for capital with other sovereign issuers and increasingly large corporate borrowers.

The pressure is notable because the borrowing surge is occurring alongside a major investment cycle in artificial intelligence and other capital-intensive industries. Companies are increasingly issuing debt to finance data centers, semiconductor facilities and other AI infrastructure, as well as investment associated with reshoring manufacturing and national security. AI companies alone have issued about $200 billion of debt so far this year, according to Sullivan, an 80% increase from a year earlier.

That additional corporate borrowing creates another source of competition for investors’ money. A pension fund, asset manager or other institutional investor allocating capital to corporate bonds is potentially allocating less to government bonds or equities, while higher Treasury yields can force companies to offer still higher returns to attract financing.

The consequences are also spilling into equity markets.

Higher Treasury yields increase the attractiveness of bonds relative to stocks, particularly when equity valuations are elevated. Investors can demand a greater expected return from stocks when government bonds provide higher yields with considerably less credit risk.

According to JPMorgan data, Treasury yields are now above the earnings yield on the S&P 500. The earnings yield is the inverse of the market’s price-to-earnings ratio and provides a simple way of comparing the income generated by equities with the return available from bonds.

That relationship makes the asset-allocation decision more difficult for investors. If Treasury yields continue to rise, equities may need either stronger earnings growth or lower valuations to remain competitive.

“The asset allocation decision becomes significantly more complex going forward as we see these environments play out,” Sullivan said.

The Treasury’s buyback programme could therefore help smooth market conditions without resolving the structural imbalance. By shifting issuance toward shorter maturities, economic experts say the government can reduce some pressure at the long end of the curve, but it also increases its exposure to refinancing risk because short-term debt must be rolled over more frequently.

That distinction is becoming more glaring as the government seeks to finance a large fiscal deficit while long-term investors demand greater compensation for holding Treasury securities. The broader concern for markets is not simply the absolute level of U.S. government debt but the amount of new debt that needs to be absorbed at a time when governments and corporations around the world are competing for the same pool of savings.

If investor demand fails to keep pace with issuance, the adjustment mechanism will ultimately be higher yields. That could raise government financing costs, increase corporate borrowing expenses, and place further pressure on stock valuations.