Deficits, inflation, and oil outrun a US$4 billion intervention as long-end yields climb again
The relief that swept through global bond markets after the US Treasury doubled its long-end buybacks evaporated within a single trading session, with 10- and 30-year yields closing Thursday above where they sat before the announcement.
The yield on the 10-year US Treasury note, the reference point for American mortgages, auto loans, and credit card debt, rose more than five basis points to 4.704 percent, according to CNBC.
The 30-year bond yield, the primary target of the accelerated buyback, added more than five basis points to 5.248 percent, while the two-year note, which tracks US Federal Reserve rate expectations more closely, edged up less than one basis point to 4.185 percent.
Treasury said Wednesday it would at least double the maximum size of its liquidity support buyback operations in the 10- to 20-year and 20- to 30-year sectors, lifting the cap from US$2bn to at least US$4bn per operation from September 9 through November 4.
Yields fell sharply on the news, with the 30-year down roughly 10 basis points from a level Reuters reported as its highest since 2007.
Adam Phillips, managing director of investments at EP Wealth Advisors, told CNBC the move is “not the cure to what ails the bond market.”
He pointed to structural forces beyond the control of the Treasury and the administration, and said relief after past interventions has generally been short lived.
The operations are negligible against a market Reuters values at US$32 trillion, and the same week brought news that US government debt had passed US$40 trillion, more than doubling since 2017.
Luis Alvarado, co-head of global fixed income at Wells Fargo Investment Institute, described the move to Reuters as short-term relief only, arguing that inflation, monetary policy uncertainty, and large fiscal deficits remain in place and that risks to long-term trends stay skewed to the upside.
In a client note, JPMorgan Chase senior research analyst Maia Crook wrote that the interventions “belie the underlying structural challenges and do nothing to address them.”
She said higher risk premia may prove the more durable consequence if investors see the Treasury Department moving away from regular and predictable issuance.
US treasury secretary Scott Bessent told CNBC on Thursday the operation could exceed the announced US$4bn, framing the objective as liquidity support in a thinly traded corner of the market competing with heavy corporate issuance tied to artificial intelligence infrastructure.
Asked whether pushing long-term yields lower would work against the US Federal Reserve, he said the buybacks had nothing to do with any potential rate decision.
Fed chairman Kevin Warsh has argued the central bank should take its cues from markets rather than guide them, a position Evercore ISI's Krishna Guha noted becomes harder to sustain when investors see the Treasury managing the long end.
Minutes from the July Federal Open Market Committee meeting, released Wednesday, showed several policymakers ready to raise rates and many saying a hike would be needed absent progress toward the two percent target.
Gennadiy Goldberg, head of US rates strategy at TD Securities, told Reuters the bar for Fed intervention remains very high, requiring evidence of severe liquidity deterioration and market dysfunction that is not currently visible.
The S&P 500 lost 66.82 points, or 0.87 percent, to 7,641.16, the Dow Jones industrial average fell 703.84 points, or 1.32 percent, to 52,759.21, and the Nasdaq composite dropped 263.92 points, or one percent, to 26,067.17.
The S&P/TSX composite index proved more resilient, easing 36.37 points to 36,365.42.
The Canadian dollar traded at 72.54 cents US, up from 72.34 Wednesday.
Energy pressure compounded the inflation picture.
The October crude oil contract rose US$2.44 to US$86.83 per barrel and Brent crude climbed to US$93.78, with disruption in the Strait of Hormuz showing little sign of easing.
The December gold contract gained US$26.10 to US$4,571.40 an ounce.
Lawrence Gillum, chief fixed-income strategist at LPL Financial, told Reuters the buyback announcement is “more of a band-aid than a panacea.”
He said it shows the Treasury Department is paying attention and will act to keep yields from rising too quickly.
