US Treasury intervention unlikely to provide lasting support

The US Treasury’s larger buyback operation may temporarily limit the rise in Treasury yields, but it is unlikely to generate a lasting bond-market rally.

• The Treasury announced that buybacks would at least double to $4bn between 9 September and 4 November, focused on maturities from 10 to 30 years.
• The announcement drove the 30-year yield down 9 basis points to 5.19% and the 10-year yield down 6 basis points to 4.65%; equities rose, gold gained 4% and the US dollar index fell almost 1%.
• The intervention appears intended to ease market concerns as yields approach 20-year highs, while FOMC minutes indicated that some participants could support rate hikes if inflation does not decline.
• A sustained fall in yields would require a longer-term US-Iran ceasefire, lower energy prices, weaker economic growth or reduced deficits; GDP remains robust, second-quarter earnings were strong and US national debt has exceeded $40 trillion.
• Hyperscaler borrowing is competing with Treasury issuance and may be inflationary in the short term, while the 10-year yield has already returned to within 4 basis points of its pre-announcement high.

Takeaway: Investors should expect continued pressure for higher yields and steeper curves unless a disinflationary shock emerges, although the Treasury’s willingness to intervene may temporarily limit the upside in yields and makes outright short positions less attractive.