The US Treasury recently announced plans to buy back $46 billion of its own debt. This move, known as a debt buyback, is aimed at reducing interest costs for the government. But it also presents an opportunity for retail investors to generate solid returns.
Retail investors own a sizable portion of US Treasury securities, whether directly or through mutual funds and ETFs. When the Treasury buys back its debt, it is repurchasing bonds from current holders. Investors who sell their bonds back to the Treasury can then reinvest the proceeds to generate new income. With interest rates still low, a debt buyback allows investors to rotate out of lower-yielding bonds into new bonds with higher rates.
The Treasury will focus its buybacks on older bonds with higher coupons, especially those maturing between 2023 and 2025. Many retail investors hold bonds in this “belly” of the curve, so they stand to benefit the most from a buyback. Investors should check which Treasury securities they currently own to determine if they could be candidates for the buyback. They can then decide to either sell those bonds for a profit or continue holding them to earn the coupon payments.
Either option allows investors to win. Those who sell take an immediate profit and can reinvest at today’s higher rates. Those who continue holding earn a coupon that now looks very attractive compared to new bond issuances. The buyback also makes the bonds that remain outstanding even more valuable, as their supply has decreased.
The Treasury debt buyback highlights the benefits of a ladder strategy. By owning bonds across a range of maturities, investors ensure they always have opportunities to sell for a profit or reinvest at higher rates. The ladder also provides stability, with long-term bonds anchoring the portfolio while mid-term bonds can be traded as needed.
For retail investors, the key is taking advantage of opportunities like the current buyback. Check which Treasuries you own, determine your best strategy, and make the trades to keep your income flowing. The $46 billion buyback allows investors to rotate out of lower-yielding bonds, reinvest at higher rates and continue benefitting from a laddered bond portfolio. Staying active and informed is the best way for retail investors to profit from the Treasury’s debt management moves.
