Dollar Weakness Exposes US Policy Premium

The US dollar remains near three-month lows despite rising real yields. The 10-year real yield has climbed about 70 basis points from its 18-month low, while the DXY index has fallen to around 99. In earlier cycles, this yield move would have boosted the dollar, but investors are now demanding higher returns to hold US assets due to fiscal pressure and policy intervention that has weakened confidence in the Treasury market's signal.

The latest Treasury buyback announcement reinforced this disconnect by doubling long-end purchases from September 9. While this briefly lowered yields, the 30-year yield soon reversed much of the decline. Buybacks can improve liquidity in selected securities, but they cannot remove heavy duration supply or create lasting demand.

Fiscal risks remain only partly priced, and the buyer base is becoming less supportive. Rising Japanese yields give domestic investors a stronger reason to repatriate capital instead of owning Treasuries with currency and hedging risk. At the same time, large deficits and limited political support for fiscal restraint point to continued US debt growth.