IMF Research Unpacks How Treasury Buybacks Improve Bond Prices and Dealer Capacity

In a landmark effort to enhance the liquidity and resilience of the U.S. Treasury market, the U.S. Treasury Department launched a liquidity support buyback program in May 2024. This initiative, which allows primary dealers to sell older and less liquid “off-the-run” securities back to the Treasury, has been examined in a pioneering IMF working paper authored by Jing Zhou of the IMF’s Western Hemisphere Department. Drawing on data and theoretical foundations built by institutions such as the Federal Reserve Bank of New York, Stanford University, the University of Chicago, and the U.S. Treasury itself, the paper evaluates the program's real-world impact on market dynamics and dealer balance sheets. The research sheds light on how a modest but carefully structured buyback program can stabilize a trillion-dollar market that forms the backbone of the global financial system.

Why Liquidity Support Became a Priority

The buyback program emerged in response to structural weaknesses exposed during the March 2020 liquidity crisis, when investors scrambled to liquidate holdings en masse and overwhelmed the intermediation capacity of primary dealers. With regulatory capital requirements tightening and the size of federal debt growing, dealers found it increasingly difficult to warehouse large inventories of Treasury securities, particularly the less-liquid ones that no longer trade frequently. In parallel with initiatives such as expanded central clearing and improved repo market transparency, the U.S. Treasury launched the buyback program to provide dealers with a predictable and orderly mechanism for offloading off-the-run debt instruments. This, in turn, was designed to preserve market-making capacity and avoid the types of dislocations that shook the market in 2020 and resurfaced in April 2025 amid fears over tariff policy shocks.

Listing vs. Buying: The Subtle Power of Expectations

One of the most striking findings of Zhou’s paper is that the liquidity benefits of the buyback program are driven more by the listing of a security for buyback than by its actual purchase. Using a difference-in-differences methodology, Zhou shows that bid-ask spreads for listed securities narrowed by approximately 0.2 to 0.4 basis points following the announcement, and that prices increased by 10 to 19 cents, effects that were both statistically significant and persistent. The mere expectation that the Treasury might absorb a security gave dealers greater confidence, easing their willingness to make markets and quote tighter spreads. By contrast, the actual purchase of a security had a much smaller additional effect on spreads, though it still lifted prices modestly. This finding underscores the power of forward guidance and predictability in influencing dealer behavior, something traditionally associated with central banks, but now seen in fiscal operations as well.

When and Where the Program Works Best

The paper finds that buyback effectiveness varies substantially depending on market context and the specific segment of the yield curve targeted. Buybacks had their most pronounced effects when applied to securities with shorter maturities, between one month and three years, and when dealers held large inventories of the targeted securities. These short-maturity buckets were oversubscribed by a factor of eight in some operations, suggesting strong dealer interest in unwinding positions. Moreover, in times of stress, the program’s impact was magnified, helping to smooth liquidity bumps in a way that random redemptions or passive market functioning could not. Zhou also used the Treasury’s “cash management buybacks”, conducted around tax payment dates for fiscal smoothing rather than liquidity support, as a clean comparison group. Even in these operations, listing effects on spreads and prices persisted, further validating the notion that regular buybacks improve price formation and reduce frictions.

Balance Sheet Relief and Secondary Effects

Beyond individual security pricing, Zhou examines whether buybacks actually reduced the inventory burdens on dealers’ balance sheets. Using weekly position data from the Federal Reserve, the paper finds that buybacks decreased dealer holdings in the targeted buckets by about $180 million for every $1 billion in buyback volume. In an unexpected yet revealing result, the buybacks also led to a $2 billion reduction in Treasury bill holdings over a six-week period, even though bills were not the target of the buybacks. This suggests a broader de-risking effect, as proceeds from buyback sales were possibly used to unwind repo positions or meet funding obligations, allowing dealers to operate more flexibly. Compared to redemptions, which often result in reinvestment in newly issued securities, buybacks appeared more effective at achieving a net drawdown in inventories, giving dealers real breathing room.

A Modest Program with Scalable Potential

While the program remains small in relative terms, roughly 0.1 percent of the off-the-run market, the evidence supports its expansion, especially during periods of elevated market stress. Theoretical modeling, based on the inventory risk pricing framework pioneered by Darrell Duffie at Stanford, confirms that buybacks reduce tail risk and flatten the marginal cost curve for dealers managing large positions. The listing effect operates by reassuring dealers that they have an exit option, while the purchase effect mechanically reduces inventory and nudges prices higher. The IMF paper concludes that although the absolute numbers are modest, the direction and persistence of the effects demonstrate the program’s value as a market-stabilizing tool. Policymakers could consider scheduling buybacks after large new issuances or scaling them dynamically when dealer inventories swell. Moreover, should Treasury General Account constraints limit cash-based buybacks, a swap mechanism, exchanging off-the-runs for on-the-runs, could be explored as a flexible alternative.

In sum, the U.S. Treasury’s liquidity support buyback program, while still in its early stages, is proving to be an effective and underappreciated lever for promoting financial stability. As global debt issuance grows and market resilience becomes a cornerstone of macro-financial policy, the lessons from this program may shape how governments around the world support market functioning, quietly, predictably, and with measurable impact.