The US Treasury Department surprised markets yesterday afternoon by announcing an increase in its buyback operations, which will “at least double” to $4bn, from 9 September to 4 November. The purchase will focus on the 10-year to 30-year part of the market. Long dated treasuries rallied strongly on the news, with the 30-year yield closing at 5.19%, a 9 basis point (bp) rally, while the 10-year rallied to 4.65%, a 6bp move from the wides of the day. The moves were not limited to the Treasury curve, of course, with equities also receiving a boost, while gold rallied 4%; however, the US dollar index was negatively impacted, falling by almost 1%.
While the rally was unsurprising given the unexpected nature of the announcement, focus quickly turned to why the Treasury had intervened and whether this could have a long-lasting impact. Treasury Secretary Scott Bessent is quickly gaining a reputation for intervening in markets, following attempts to stabilise the Japanese Yen just a few weeks ago. While the official reason for yesterday’s change was to improve liquidity (strangely not deemed necessary at the regular quarterly announcement just two weeks ago), this domestic move appears to point to an attempt to calm nerves as Treasury yields moved steadily towards 20-year highs.
The timing of the move suggests the Trump administration is feeling the rate pressure, possibly with midterm elections on the horizon. It may also be because there is no other help at hand: President Trump is doubling down on “crushing economic operations” on Iran, while the Federal Open Markets Committee (FOMC) minutes, also released last night, showed that many participants believed that hikes would be needed if the rate of inflation fails to decline. It is not easy to see what the endgame is for the US administration.
While the move offered some relief to Treasury bulls, we continue to believe that the factors to drive yields significantly lower from here are limited. The “easiest” path to rate cuts being priced in again is probably a longer-term ceasefire between the US and Iran, which would reopen the Strait of Hormuz and pave the way for sustainably lower energy prices. However, while a ceasefire would probably deliver a rally, yields would likely remain in the mid-4% range until there was clear evidence that inflation was on a downward path again, allowing the Federal Reserve (Fed) to contemplate rate cuts.
For a broader rally to take hold, markets would likely need to expect weaker economic growth or lower deficits, neither of which appears likely. GDP growth remains robust, and strong earnings reports have just been delivered for the second quarter. At the same time, headline US fiscal spending remains elevated, with the US national debt passing $40tr earlier this week. Meanwhile, aggressive Hyperscaler borrowing and spending is currently more likely to be inflationary at the margin, even if the artificial intelligence (AI) technology it supports may prove deflationary in the longer term. Also, given the sheer size of issuance, hyperscalers are actually providing competition for Treasuries at the moment. Absent a disinflationary economic shock, pressure for higher yields and steeper yield curves is likely to remain in place, in our view.
While we are sceptical that this move, in isolation, can drive yields sustainably lower, indeed the 10-year yield is now just 4bp below yesterday’s highs, the intervention is a strong signal to markets that the US Treasury is willing to act when yields become uncomfortably high. This, along with the fact that both nominal and real yields have moved markedly higher in recent weeks, may help to provide a ceiling to yields, in the short term at least, and certainly it would take a brave investor to short Treasuries, outright, at these levels. But if the Treasury was hoping for materially lower yields, and in turn mortgage rates, they are likely to be disappointed.
