U.S. Treasury’s New Activism Adds Another Variable for the Dollar and International Equities

U.S. Treasury activism is making a weaker or merely stable dollar more plausible, potentially creating a tailwind for international equities while raising questions about long-term borrowing costs.

• Within three weeks, the U.S. joined Japan in supporting the yen as USD/JPY approached 164, while encouraging foreign governments to use the Federal Reserve’s repo facility rather than sell Treasurys; Japan holds roughly $1.2 trillion of them.
• On August 19, Treasury doubled planned liquidity-support buybacks of 10-to-30-year securities to $4 billion per operation after the 30-year yield reached 5.34%, its highest level in nearly 20 years; the announcement initially lowered the yield by about 10 basis points and weakened the dollar.
• Treasury describes the purchases as liquidity operations rather than quantitative easing, and their scale is small relative to a Treasury market exceeding $30 trillion, but Jefferies’ David Zervos argues that buying discounted bonds could facilitate further fiscal expansion.
• J.P. Morgan warns that opportunistic debt management without fiscal consolidation could undermine issuance predictability and eventually increase the term premium; similar measures by sovereign debt offices have generally produced only temporary yield effects.
• Macquarie estimates that aggregate U.S. debt relative to GDP has stayed near 3.4 times for more than a decade, arguing that strong corporate and household balance sheets reduce the likelihood of an imminent debt doom loop.
• A dollar move from around 99 toward the low-to-mid 90s would provide a meaningful translation benefit to U.S. owners of foreign assets, even without a currency collapse; however, U.S. real yields, technology leadership and the dollar’s reserve-currency role remain important supports.

Takeaway: Investors should consider a regime in which Treasury resistance to excessive long-term yields and currency dislocations limits traditional dollar support, improving the relative case for international equities, although fiscal deficits could still keep long yields elevated and weaken the thesis.