US Treasury Buyback Boosts Long End of Yield Curve
The US Treasury's decision to increase liquidity support buyback operations for longer-dated nominal coupon securities has triggered a rally in the long end of the US yield curve. The Treasury will increase the size of these operations by at least double, from $2bn per operation, and this change will apply to seven more buybacks from September 9 through November 4. The goal is to retire illiquid older debt and replace it with more actively traded benchmarks, improving overall market depth.
The US 30-yr yield moved above 5.3% for the first time since 2007, driven by real yields rather than inflation expectations. This has significant implications for the US budget deficit and is being closely watched ahead of next week's Jackson Hole meeting. Some expect a hawkish message from speakers at the event, which could help put a lid on the inflation risk premium embedded in long-term bond yields.
The Treasury announcement had consequences beyond financial markets, with the dollar losing appeal as EUR/USD cleared the 1.16 technical resistance area to close at 1.1677 (highest since end May). US stock markets managed a slight positive close while gold rallied to its best level since early June on the drop in US real yields.