Once again, plenty who should know better are letting themselves down when it comes to US macro developments.
I refer, of course, to Wednesday’s announcement from the US Treasury, that buybacks at the long-end of the curve will increase from at least $2bln per operation, to at least $4bln.
Yes, the numbers involved here are ‘small beer’. But that’s not the point.
Firstly, those two words - ‘at least’ - are pivotal. The offer/cover ratio of the last buyback operation was almost 10x, so buying back over and above the $4bln mark would be easy to do, and send an even stronger signal.
Secondly, signalling is the entire point here. What the Treasury, and Secretary Bessent, are doing is effectively firing a warning shot across the bow of market participants tempted to short the long-end of the curve. The unwritten message is ‘we’re watching, we don’t like what we see, and we’re prepared to act’.
Ultimately, this is just the latest piece in the puzzle of the activist Treasury seen during the Trump Admin. First, it was propping up the JPY. Now, it’s tamping down long-end yields. Whether you like it or not, and whether you think it’s ’anti free markets’ or not, doesn’t really matter. This is how Bessent & Co will operate, and another sell-side mental breakdown akin to that seen after the July FOMC meeting shan’t change his mind!
Of course, the Treasury can go further, and faster, here if need be. In all likelihood, they probably will. As mentioned, buybacks could be ramped up above the $4bln mark with ease, while the next QRA will probably see issuance increasingly tilt towards the front-end and belly. That wouldn’t be anything new, on a global level, with the DMO here in the UK having been ahead of the curve on that one for some time now.
All in all, this makes me harken back to the first note I wrote this year. In which I said that the ‘don’t fight the Fed’ mantra should be extended to not fighting the Treasury, or the President either.
Handily, all three of those have told us what they want. Chairman Warsh clearly wants to hold the fed funds rate steady, having not taken the ‘open goal’ on offer of hiking at the end of July. Secretary Bessent clearly wants lower long-end yields, as this week’s action has evidenced. And, last but not least, President Trump clearly wants higher equities, continuing to use the stock market as a yardstick for his Admin’s performance.
I remain reluctant to bet against any of them. Yes, the benchmark 10- and 30-year yields pared the post-buyback announcement fall in short order this week, but that’s not the point. A very strong signal has now been sent, the results of which we should judge over three or even six months. My money is on long-end Treasury yields being a fair chunk lower by then.
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