US Treasury doubles long-dated bond buybacks: Why are yields rising again?
- US Treasury yields stabilize on Thursday after Wednesday’s sharp decline, with the 10-year yield edging back up to 4.672%.
- The US Treasury doubled the size of some long-dated debt buybacks, a surprise decision that helped ease the recent surge in yields.
- Several analysts warn that the impact could prove temporary, as the buybacks remain small relative to outstanding debt and US financing needs.
The US 10-year Treasury yield attempts to stabilize on Thursday, edging higher to 4.672% at the time of writing after hitting a low of 4.635% on Wednesday. The move comes after Treasury yields fell sharply following the United States (US) Department of the Treasury’s surprise announcement regarding its long-dated debt buybacks.
The Treasury announced on Wednesday that, starting September 9, it will double the size of its liquidity-support buyback operations for maturities ranging from 10 to 30 years, increasing them from $2 billion to at least $4 billion per operation. The announcement helped interrupt the recent surge in yields, which had pushed the 10-year yield close to 4.75% on Tuesday and the 30-year yield toward its highest levels since 2007.
According to ING, the timing of the announcement is particularly noteworthy, as the Treasury had published its quarterly buyback schedule only two weeks earlier. The bank argues that the decision could signal to investors that authorities are closely monitoring the rise in long-term yields and are prepared to act to ease market tensions.
The longer-term impact could nevertheless remain limited. ING notes that the $4 billion involved is small compared with issuance volumes and the overall amount of US debt outstanding. The buybacks also do not represent structural bond purchases, as they ultimately need to be refinanced. Kieran Davies of Coolabah Capital similarly argues that significantly larger purchases would generally be required to have a lasting impact on yields.
The stabilization in yields comes as the US Dollar (USD) remains under pressure despite the more hawkish Federal Reserve (Fed) Minutes released on Wednesday. The US Dollar Index (DXY) declines another 0.10% on Thursday to 98.70 at the time of writing, extending Wednesday’s fall. Lower US yields are weighing on the Greenback, although persistent fiscal and inflation concerns could limit the Treasury intervention’s ability to keep long-term rates contained over time.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.