Treasury's Bond Buyback Won't Influence Fed Decision

The US Treasury Department has doubled down on its effort to stabilize the long end of the bond market by increasing its planned purchases of outstanding 10- to 30-year debt. As a result, Krishna Guha, vice chair and head of central bank strategy at Evercore ISI, expects this move to have little impact on the Federal Reserve's next decision.

The Treasury announced it would raise the maximum size of its nominal long-end buyback operations from $2 billion to at least $4 billion per operation, effective September 9 through November 4. This move is aimed at interrupting a feedback loop where higher borrowing costs amplify fiscal deficits, which in turn push more issuance into the market.

Guha believes that the Treasury's liquidity tool and the Fed's interest rate framework operate on different tracks. He thinks that the September decision will hinge on inflation readings, labor market data, and growth metrics, not on whether the Treasury is buying back a few extra billion in seasoned bonds.