LONDON, Aug 19 (Reuters) – U.S. long-dated Treasury yields fell sharply on Wednesday from around their highest level in 19 years, in a move that followed the U.S. Treasury announcing it would double the size of liquidity support buyback operations for longer-dated bonds.
Thirty-year U.S. bond yields fell almost 10 basis points (bps) to 5.188% before bouncing to trade at 5.208%.
The U.S. Treasury Department said on Wednesday it would double the size of liquidity support buyback operations for longer-dated nominal coupon securities from $2 billion to at least $4 billion per operation.
The change, which will apply to the 10-year to 20-year sector and the 20-year to 30-year sector, will be effective Sept. 9 through Nov. 4, it said in a statement.
Stocks were higher after the move, with the Nasdaq composite rising 0.4%, and the dollar was lower, with the dollar index down 0.7% to 98.95.
COMMENTS:
RYAN SWIFT, CHIEF US BOND STRATEGIST, BCA RESEARCH, MONTREAL, QUEBEC:
“There are two dynamics at play that explain the market’s reaction to this morning’s Treasury announcement.
“The first is a generic signaling effect. The data does not indicate that rising long-maturity yields were driven by a deterioration of liquidity, so this move shows that the Treasury department is sensitive to the increase in yields and is willing to take steps to try to mitigate it.
“The second dynamic is more of a continuation of a trend that’s been going on for a while where the Treasury is trying as much as possible to finance the deficit by increasing bill issuance and keeping coupon issuance stable. Mechanically, this buyback announcement is equivalent to further shifting the deficit financing burden to the front-end of the curve.
“The market will be the ultimate constraint on how far the Treasury can shift its issuance away from long-dated coupons and into T-bills. Already, the spread between the 3-month T-bill rate and 3-month OIS is getting pretty wide. If that trend continues then the Treasury will have to shift some of the financing burden back into coupons. I think it’s likely this will happen by early next year.
“The big investment implication is that the Treasury’s ability to suppress long-dated yields using this method of shifting issuance to the front end is necessarily limited by T-bill/OIS spreads at the front end of the curve. I therefore see these measures as only moving bond yields temporarily.
“The Treasury’s toolbox is limited to changing the maturity structure of the debt. So, all it can really do is change auction sizes and buyback amounts. If it does anything too extreme, then the market will push back and force them to reverse course.
“Of course, the Fed has an unlimited capacity to buy as many Treasury securities as it wants of any maturity. But the trend at the Fed seems to be moving toward shrinking its balance sheet rather than expanding it.”
JOSEPH PURTELL, SENIOR VP, PORTFOLIO MANAGER AND RATES TRADER, NEUBERGER BERMAN, CHICAGO:
“We have always sort of suspected that this Treasury in particular, that they were going to be more responsive to funding conditions than prior Treasury departments.
“For us, in thinking about the context around this, is an extra $2 billion per buyback really worth a full 9 nine basis points, relative to supply/demand mismatch that got us into this mess in the first place? No, but they have other tools; if push came to shove, they could use other tools to push long yields lower.”
“It’s going to help today, it will be helpful in the very short term today as the market fully appreciates that the Treasury has some sort of soft line in the sand here for Treasury yields. But it doesn’t address the glaring supply issue. Deficits show no reason to go down. On the demand side, a lot of these preferences for long-term debt tend to be narrative driven.”
“There are structural fiscal issues that haven’t been addressed for a very long time. The more interesting battle will be addressing longer-term issues, and who will be there to underwrite that debt.”
MICHAEL GREEN, CHIEF STRATEGIST, SIMPLIFY ASSET MANAGEMENT, PHILADELPHIA:
“This should send the US$ lower and gold higher WITHOUT a meaningful increase in inflation expectations. Note the forward inflation swap above (5y5INFSW in orange) has ticked lower on Day 1.
“The next step in this process requires Fed Chairman Kevin Warsh to do the right thing and cut rates at the next Fed meeting. This will steepen the curve and should start a bull steepener, which will catch macro accounts in the bear steepener asleep—the steepening will offset their losses in long-end bear positions until they are trapped.
“In turn, the steepening and long-end rally will begin to release duration from the mortgage market, compressing elevated mortgage spreads. Index funds will buy in proportion to market cap, not notional, raising the bid for long-end bonds. A positive cycle can commence that compresses artificially inflated real-rates to the benefit of the economy and the detriment of the rentier class.
“I’ve emphasized that long bonds and, in particular, inflation-protected long bonds were the neglected asset class. Secretary Bessent just told you supply is going to shrink of the most convex components of that asset class.”
MICHAEL LORIZIO, HEAD OF U.S. RATES AND MORTGAGE TRADING, MANULIFE INVESTMENT MANAGEMENT, BOSTON:
“I think it goes to show a pretty strong acknowledgement from the administration that there’s an inconsistent amount of demand, especially in off-the-run securities in the very back end of the Treasury curve, and this is consistent with some of the advice that they had received from the Treasury Borrowing Advisory Committee in the past that liquidity operations in the very back end of the curve had room to be increased.
“It’s difficult to ignore that this is occurring at the cycle highs in yields for the very back end of the curve. Some would suggest this appears to be more of a quantitative easing. But the Treasury does have a basis and a justification already existing for this move from the Treasury Borrowing Advisory Committee and the Treasury Borrowing Advisory Committee, obviously consisting of people on both sides of Wall Street and the market makers and the most active participants, made the case that liquidity enhancements were needed in that part of the curve even before rates reached these elevated levels.”
THOMAS SIMONS, CHIEF US ECONOMIST, JEFFERIES, NEW YORK;
“It feels very similar to the yen intervention in that it was something that seems like they just shot from the hip.”
“Treasury has a policy that goes back to the mid-1970s that prioritizes being regular and predictable in their communication on issuance. And granted this is not issuance, this is actually the reverse of issuance, its buybacks, but still I think the market has come to expect that those types of announcements are going to be at the refunding. They’re often preceded by questions in primary dealer surveys that circulate before the refunding and are publicly available on the Treasury’s website. So I am really taken aback by this.”
“Treasury may be concerned that yields are a little bit too high, but I don’t think that this is going to be a net helpful thing in the long run.”
“I don’t think the Treasury realizes how significant this is in how they’ve damaged their credibility in terms of how we can trust any announcement that they’ve made before.”
“The Treasury, almost to their detriment, has been very, very slow moving in the past in making adjustments to their issuance patterns, sizes of auctions. But one thing that they’ve been extremely consistent with up to this point is a transparent, consistent expected pattern of communication. And this is this just completely upends that pattern.”
“If the aim of this is to reduce term premium or long-end yields, I think this is an incredibly short-sighted strategy to try to do such a thing. I don’t think that they appreciate what kind of premium is built into yields that is related to the idea that we’re not surprised by things.”
BRIAN JACOBSEN, CHIEF ECONOMIC STRATEGIST, ANNEX WEALTH MANAGEMENT, WISCONSIN:
“Bonds are rallying because of the Treasury’s announcement, but it’s a temporary salve.”
“It shows how we’re in an era of fiscal dominance and modern monetization. The Fed is impotent in affecting long term rates. Now the Treasury is going to issue more short-term debt because of weak demand for long term debt. Even if the Fed hikes, the Treasury is effectively pumping more money-like short-term debt into the economy. (U.S.Treasury Secretary Scott) Bessent is more important to the inflation outlook than (Federal Reserve Chair Kevin) Warsh is.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“What this does is it relieves short-term pressures in the long end of the market… It’s a gimmick. Does it work? It will probably work for a while until the vigilantes are back again. It also is a way of propping up economic activity.
That’s healthy for the stock market, and that’s exactly why we’re seeing this rally this morning. How long will it last? That’s a question mark. It also probably discredits to a certain degree whatever news we get out of the FOMC this afternoon.”
JEREMY STRETCH, HEAD OF G10 FX STRATEGY, CIBC, LONDON:
“What we’ve seen in the course of recent days is that the long end of the bond market has obviously been selling off and potentially becoming somewhat problematic for the play through to other asset classes.
“So, clearly, the Treasury Secretary has to be mindful of those risks and has made adjustments. That’s why we are (now) seeing US 30-year Treasury yields down sharply and the dollar cheapening.
“The are still concerns about inflation, the debt profile in the G4, the impact of AI.
“But this measure shows the U.S. Treasury recognises what is going on the bond market and is prepared to adjust policy in order to limit pressures on the market.”
RENE ALBRECHT, SENIOR ANALYST, DZ BANK, GERMANY:
“I think they fear the pain of 5% or higher yields on the long-end, not only because it raises the interest rate costs for the government but also for the private sector. It’s only three month until the midterm elections.”
“There is a connection between the recent rise in yields and this kind of action from the Treasury. “
“You’ve seen the market reaction, yields dropped down at the long-end, so that’s the primary target or aim of this operation.”
“They have had to grab into the toolkit in order to get a hand on the recent rise in yields.”
(Compiled by the Reuters Markets team. Editing by Elisa Martinuzzi, Dhara Ranasinghe and Colin Barr)
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