Treasury Buyback Backfires, Yields Soar as Gold Prices Defy Expectations
The US Treasury's attempt to buy back long-term bonds has ironically pushed their yields higher. Last night, the Treasury raised its single long-bond buyback from $4 billion to $6 billion, but this move only served to increase the 10-year Treasury yield to a new high of 4.85%, surpassing November 2023 levels.
The main driver behind this selloff is not inflation expectations, but rather the collapse in demand for Treasuries. Sovereign funds are pulling out, with Norway's sovereign wealth fund proposing to cut its allocation from 34.1% to 21.9%, corresponding to a reduction of about $80 billion. Meanwhile, Japan's central bank is poised to hike interest rates by 25 basis points next week, siphoning away the largest block of overseas buying.
As demand contracts and supply expands, bond investors are demanding a higher risk premium due to inflation, fiscal risks, and heavy issuance. The probability of the 10-year Treasury yield rising to 5% is growing, according to Saxo Bank chief investment strategist Charu Chanana.