It may be a new week, but the ‘hot takes’ on efforts to tamp down long-end yields just won’t stop.
Of course, the issue in question remains that of the US Treasury’s plans to increase buybacks at the long-end of the curve. However, focus is now starting to fall on how those purchases may be funded, after a CNBC piece earlier today suggested that the Treasury General Account (TGA) could be used.
This is, at face value, interesting, considering that most participants - including myself - had assumed that increased long-end buybacks would be funded via increased issuance of short-term Treasury bills, and not cash, as has been alluded to today. Clearly, funding buybacks via cash would, all else equal, further reduce net issuance, and further reduce upward pressure on yields across the curve.
That said, there is a catch.
That catch is that, while the Treasury Secretary has discretion over how high a TGA balance they wish to maintain, shifting to a longer-lasting regime of a lower TGA cash balance would, again all else equal, result in an increased term premium. How would that increase in term premium be expressed? Through higher long-end yields, of course.
You’re probably ahead of me at this point, but in case you’re not, that would mean that this entire exercise becomes somewhat self defeating. Ergo, any decline in yields triggered by expanded buyback operations would largely net off against an increase in yields caused by a higher term premium.
That is, again, where I think many market participants are missing the point. All this hullabaloo over the buyback plans themselves, and now over the source of funds for said buybacks, is rather moot - unless you’re uber-obsessed with financial plumbing, in which case professional help is available for you. As mentioned last week, what matters here is the signal - Treasury are attentive to market developments, don’t like what they see, and will adopt an activist approach to engineer their preferred outcome.
In that vein, there are plenty of parallels that we can draw with recent efforts to prop up the value of the JPY, whereby the signal of the Treasury stepping in - via the NY Fed - is worth orders of magnitude more than the €5bln to €10bln that the Treasury actually spent in that operation. Added to which, if a weaker USD proves to be the ‘pressure release valve’ through which lower long-end yields materialise, the Admin are unlikely to be especially perturbed, considering a long-standing preference for a softer buck.
All this brings me back to the conclusion of Friday’s note, whereby market participants now have two choices. Either, one can moan and groan from the sidelines about this not being the way things ‘should’ be done; or, one can accept that this is now how things are, and get on with it, in the knowledge that ‘fighting the Treasury’ is utterly futile.
As such, the market implications are fairly self-explanatory over the medium-term - bullish gold (and other precious metals), bullish long-end Treasuries, and bearish USD.
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