By: Editorial Team, StoneX Media
U.S. public debt has topped $40 trillion for the first time, and the U.S. Treasury has doubled its planned buybacks of 10 to 30-year debt. Expanded Treasury buybacks are not yield curve control, but they sit close enough to the line that investors have started asking where that line falls. The stated purpose is improving market functioning and liquidity, and on the numbers alone the increase is a rounding error against the size of the Treasury market. The risk is not the operation. It is the interpretation.
David Scutt is a Senior Market Analyst for Global Macro at StoneX Media, with more than a decade spent as a foreign exchange spot, forwards and money markets dealer in bank treasury, managing interest rate and liquidity risk. He produces technical and fundamental analysis across foreign exchange, commodities and equity indices, the three places where a change in the U.S. Treasury's reaction function tends to show up first.
The doubling of planned buybacks of 10 to 30-year debt is a liquidity operation, not a yield target, and the distinction is mechanical rather than rhetorical. Yield curve control commits a policymaker to defending a level, whereas the current program has a defined size and, for now, runs only to early November. David Scutt is direct on the gap between the two, noting that "one announcement does not amount to anything like yield curve control". Wednesday's move in long dated Treasury futures was also amplified by heavy short positioning, which means the market reaction overstated the mechanical impact of the operation itself. The thing to watch is not this buyback window but whether the U.S. Treasury returns to the tool each time long end yields become politically uncomfortable.
The United States runs a persistent current account deficit and a net international investment position of around negative $21 trillion, which means it depends on foreign capital continuing to flow into its assets. High yields are one of the main mechanisms attracting that money, so preventing yields from adjusting removes the compensation investors would otherwise receive. "The deficit financing requirement does not simply disappear if yields are prevented from doing all the adjusting", Scutt argues, and the residual has to land somewhere. The currency becomes the release valve, because a weaker dollar is what makes U.S. assets attractive again once the yield on offer has been capped. For investors holding U.S. exposure, that turns a bond market story into a foreign exchange one.
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--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: David Scutt, StoneX Media Senior Market Analyst
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