Treasury Secretary Scott Bessent's move to sharply expand long-end bond buybacks calmed a panicked bond market and is now rattling the dollar. Deutsche Bank says the intervention amounts to soft financial repression and is unambiguously negative for the currency, regardless of what the Federal Reserve does next.
Treasury doubles its buyback pace
The Treasury said it will double the maximum purchase amount of 10- to 30-year Treasurys per operation to at least $4 billion, starting September 9 and running through November 4. The move followed a run-up in long-term yields, with the 30-year bond topping 5.3% this week, its highest level in nearly two decades.
Within hours of the announcement, that yield dropped close to a tenth of a percentage point, and the S&P 500, Dow Jones Industrial Average and Nasdaq Composite all closed around 0.2% higher. Bianco Research's Jim Bianco captured the market reaction, quipping that "bond traders can stop panicking when Scott Bessent starts panicking." Natixis rates strategist John Briggs said the timing signals the administration was uncomfortable with recent market moves.
At a sustained $4 billion pace, Treasury would buy back close to 30% of expected annual issuance in the 10- to 30-year segment, though just 2.4% of outstanding debt in that range, according to Natixis figures cited by the Wall Street Journal. Some investors quoted in the report were skeptical the buyback would have lasting impact, while others suggested the move looked politically timed ahead of the midterms, given mortgage rates approaching 7%.
Deutsche Bank calls it financial repression
Deutsche Bank offered a sharper read on the announcement. The bank linked the buyback decision to recent discouragement of currency intervention from Japan, framing both as signs the administration is uncomfortable with the sustained rise in long-end US yields. It characterized the buyback, alongside encouragement for foreign central banks to tap the FIMA repo facility, as soft financial repression aimed at containing the long end of the curve.
Its reasoning centers on a mechanism: if Treasury prices are not allowed to adjust downward, the adjustment must instead flow through a weaker dollar for foreign holders of US debt. The bank also compared the operation to the Federal Reserve's operation twist, noting Treasury would need to issue more bills to fund the removal of duration from the market. It added that any failure by Fed Chair Kevin Warsh to acknowledge the buyback's easing effect on financial conditions would be a further headwind for the currency.
Markets, in the bank's view, will stay focused on further Treasury market support measures, with dollar weakness likely to intensify the more such steps are seen as distorting market pricing.
Sources: Investinglive, Investinglive
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