The US Treasury surprised the market yesterday by announcing that they will increase buybacks of 20 to 30 year Treasury bonds from $2b to at least $4b. With a cadence of four buybacks per quarter, this amounts to an increase of at least $32b of buybacks per year against a gross issuance of $444b per year in the 20-30 year sector.
The announcement of buybacks is a nothing burger, and a week from now the market will have forgotten it. I’ve seen takes on X saying that the buybacks are QE or Yield Curve Control (YCC) but they are neither. No money is being printed to fund the purchases, and it is the Treasury carrying out the buybacks, not the Fed. The Treasury is merely shifting liquidity from the short end of the curve (funding the purchases with Tbills) where the additional supply would be easily absorbed to the long end of the curve where the impact is more meaningful. The additional amount of $32b per year is peanuts when compared to the annual issuance of $444b in 20-30 yr bonds. Even if the commentators with the bad takes were right and if it was pure QE, $32b would be a drop in the bucket compared to previous QE campaigns undertaken by the Fed.
Markets reacted violently to the announcement - 30 yr yields sold off by 8 bp, gold rallied by 3.6%, and Bitcoin rallied 11% (BTC was also buoyed by a headline from the White House Crypto Summit saying that the US considers buying “sizable” amounts of Bitcoin & other crypto). Equities saw a more muted reacted, with S&P futures rallying 0.6% and giving up its gains at the time of this writing. SMH even finished the day down 1.55% as it struggles to retake leadership of the market.
The market reactions to the news were a function of underlying positioning and sentiment present in the respective markets. BTC saw the most outsized move as crypto sentiment and positioning have already washed out and hit rock bottom. The same applies to gold, which only recently started rallying from oversold conditions. The muted reaction in equities suggests that the market is looking to distribute into rallies.
I would not be chasing these moves. We know that Trump’s bullish announcements on crypto are not credible. After banging the drum on being long gold since mid-June, I’m starting to trim exposure now that gold is retesting its 200 dma from below.
Acts of intervention on the financial by the Treasury are becoming more frequent, with the Treasury’s joint intervention to sell USD/JPY happening less than three weeks ago. Both interventions to buy the yen and to increase purchases of long bonds merely served to treat the symptoms, not the causes, of excessive government borrowing and supply of duration by Japan and the US.
The corporate sector is also raising the most amount of bond and equity issuance in history (to fund data centers), crowding out demand for government debt. If we are indeed near the end of this business cycle, one of the main culprits will be the growing imbalance between the demand for capital versus supply of liquidity.
US core CPI is stabilizing in the mid-2% handle, but headline CPI is still vulnerable to geopolitical shocks. A report from WSJ cites evidence that Iran intends to lock the US in a forever war. Brent crude is retesting 3-month highs due to the ongoing conflict in the Strait of Hormuz, and grain prices are soaring due to Ukraine’s attacks on Russian grain ships and export terminals. Inflationary shocks are increasing in frequency and intensity, creating a conundrum for the Fed.
Odds and Ends
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