US Treasury Buys Bonds, Yen, and Time to Stabilize Markets

The US Treasury has been making headlines this summer with its unprecedented interventions in financial markets. In mid-August, it announced that it would double the size of its liquidity-support buybacks for 10-to-30-year bonds, a move aimed at stabilizing long-term yields.

This decision came after 30-year Treasury yields reached their highest level since 2007. Only weeks earlier, the US had joined Japan in a rare coordinated intervention to support the yen, selling euros from its Exchange Stabilization Fund and purchasing yen alongside Japan's Ministry of Finance.

The bond buybacks are not quantitative easing, as they involve purchasing and retiring older securities rather than reducing the government's overall borrowing requirements. Any cash used must be financed through revenues or additional debt issuance elsewhere. The amounts are modest relative to the $32 trillion Treasury market, but signaling matters - long-term yields fell sharply following the announcement.

The currency intervention may have been related, as Japan has indicated that it plans to access the Federal Reserve's Foreign and International Monetary Authorities repo facility, allowing it to borrow dollars against its Treasuries rather than sell them outright. This move could be seen as an attempt by the US Treasury to prevent instability in one market from spilling into another.