The US Treasury raised the size of its buyback operations to $4 billion per transaction as it seeks to limit pressure in the long-term bond market. Although the increase from $2 billion pushed bond yields lower in the short term, experts said the intervention may not produce lasting results.
US Treasury yields declined
The Treasury operations cover nominal coupon bonds with maturities of 10–20 years and 20–30 years. The increase in the buyback amount strengthened expectations that long-term borrowing costs would decline.
The yield on the benchmark 10-year US Treasury note fell 8 basis points to 4.64% on Wednesday. The yield was trading at around 4.68% on Thursday.
The yield on the 30-year bond also fell 10 basis points to 5.19%. After reaching 5.34%, its highest level in 19 years, the yield stabilized at approximately 5.23% on Thursday.
Debt concerns among investors intensified selling
Concerns over rising public debt created selling pressure in bond markets in the United States, Germany and Japan this week. Heavy borrowing by technology companies to finance artificial intelligence investments and persistently high oil prices due to conflicts in the Middle East also increased concerns about inflation.
Uncertainty in US-Iran relations and risks around the Strait of Hormuz were among the other factors affecting the outlook for bond markets. High oil prices and inflation continue to increase upside risks to long-term bond yields.
Experts highlighted the limits of the Treasury’s move
Kutay Güzgör, director of investment research at Kuveyt Türk, said the buyback decision should not be viewed as a routine liquidity measure. Güzgör said the Treasury was intervening as borrowing costs showed signs of getting out of control.
Güzgör said the rise in 30-year bond yields to their highest levels since 2007 had begun to threaten the real economy through housing and corporate loans. He said the Treasury’s move could be considered a form of the central bank’s “Operation Twist” policy, which aims to encourage private-sector borrowing and spending.
Güzgör said the Treasury had stepped in instead of the central bank because inflation risks remained, adding that interest rates were being pushed artificially lower through the use of liquidity obtained from short-term bond issuance. However, he emphasized that this method did not constitute a lasting solution.
Budget deficit and inflation will determine the pressure
Güzgör said the term premium demanded by investors for long-term uncertainty would remain high as long as the United States faced a record budget deficit, rising defense spending and high inflation. He said weak demand for the 20-year US Treasury bond showed that investors had not yet been fully convinced by the Treasury’s move.
Güzgör said the central bank’s room for maneuver was limited by its balance-sheet reduction targets, high inflation and tight monetary policy, adding that responsibility for preventing a possible tightening of financial conditions had largely fallen to the Treasury.
Güzgör said the Treasury could restructure the composition of its borrowing if long-term bond yields approached 5%, with greater emphasis placed on the short end of the yield curve rather than long-term bonds to finance budget deficits.
Güzgör emphasized that this option also had limits, warning that excessively increasing the share of short-term borrowing in the budget could raise refinancing risk. He said continuous intervention in market dynamics could affect the credibility of the US dollar over the medium term and that steps taken without correcting macroeconomic fundamentals could merely postpone pressure on the bond market until the following quarter.
Kyle Rodda, a senior financial markets analyst at Capital.com, said the Treasury’s decision could ease short-term pressure in the bond market. Rodda said long-term interest rates could be kept below the levels they might otherwise reach, but that upside risks to yields remained and new interventions might be needed in the future.
